Standing Committee E

[Mr. Win Griffiths in the Chair]

Health and Social Care (Community Health and Standards) Bill

Clause 11 - Power of Secretary of State to give financial assistance

Question proposed [this day], That the clause stand part of the Bill. 
 Question again proposed.

Chris Grayling: I welcome you back to our debate, Mr. Griffiths. I was midway through my remarks, and I have been scrabbling around in my notes to work out what I had asked the Minister, and he likewise. He plans to answer some of my questions in detail, so I shall not reiterate them now.
 In concluding my remarks, I should like to touch on two issues to which I should be grateful for the Minster's response this afternoon. First, where will the allocation appear on the nation's accounts; both the new facility that he talked about this morning—which has been set up in his Department—and additional borrowing secured by foundation trusts from the private sector or other sources? Will it appear as part of the public sector borrowing requirement, or will it simply and only appear on the foundation trust's own balance sheets? 
 I touched on my second point as we were about to adjourn this morning. It concerns the impact of the national tariff's phased introduction on foundation and non-foundation trusts. Clearly, there is a risk. If a foundation trust can retain a surplus generated by producing its services at a lower cost than the national tariff, it will gain a specific benefit. It will be able to reinvest that money in additional services and improve its position relative to other trusts. Under the current rules, those trusts that are not entitled to foundation status must return any surplus generated in the same circumstances to the Treasury. Therefore, those trusts would be at a disadvantage. That highlights one of the reasons why my right hon. and hon. Friends and I had significant misgivings about the overall measure.

Andrew Lansley: My hon. Friend said that, currently, an NHS trust that generated a surplus on its activities would have to return the money to the Treasury. I am not sure that I understand the point in the way that he does. Would they not be able to carry over any surplus at the year end?

Chris Grayling: Not under the national tariff. The Minister made the point this morning that once the tariff is introduced, foundation trusts that can carry out services for a lower cost than the national tariff rate will be able to retain that difference as a profit
 margin and reinvest it. However, my understanding—the Minister can correct me if I am wrong—is that a non-foundation trust will not have the same right. Therefore, it will not have the same incentive to reduce costs and become more efficient. It will not be able to generate additional funds in that way to enable it to invest in more and better services.

Andrew Lansley: I did not understand the matter that way, but there is no point in debating it because the Minister will tell us in a minute. There will be other issues, but I did not see this as the source of a disparity. I saw all trusts possibility being lower-cost providers and therefore generating surpluses that would be available for investment elsewhere.

Chris Grayling: I am sure that my hon. Friend will agree that if this were a general right for all trusts, it would not be something that would relate to foundation hospitals. It would be a matter of course for all trusts, regardless of their circumstances.

Evan Harris: This is a fundamental question, and it is easily answered. In order that we can make progress, I invite the hon. Gentleman, in his interesting and well-thought-through address, to request the Minister to deal with the question now. We can then make progress on some of the substantive matters.

Chris Grayling: I was about to conclude my remarks by saying that I hoped that the Minister could enlighten us on that. Our argument has always been that foundation status should be accorded to all hospitals. If foundation status is phased in, only a small number of hospitals will have foundation status at the start. Phasing in the national tariff will create distortions between hospital trusts. That cannot work to the advantage of patients. I should be grateful to the Minister for clarification on those points, and I hope that he will be able to enlighten us.

George Young: I am sure that the entire Committee was grateful to the Minister for setting the framework for this part of the Bill this morning. That will save time when we are dealing with subsequent clauses, in the sense that we now have the template within which we are operating.
 I want to return to clause 11 and the question of grants. I am sure that my hon. Friend the Member for South-West Devon (Mr. Streeter) was right when he said that although foundation trusts are interested in pioneering a new form of social ownership, they are much more interested in whether they can be free of the shackles of the Treasury, access more capital and help to deliver a better local health service. 
 The Minister's comments on the national tariff were interesting, albeit somewhat tangential. As my hon. Friend the Member for South Cambridgeshire said, the level at which the national tariff is pitched will decide the extent to which foundation trusts can borrow, because it will determine the margin between their income and their expenditure. There is also the related issue—touched on by hon. Friend the Member for Epsom and Ewell (Chris Grayling), which I know the Minister wants to address—of what happens to the surplus in the hands of non-foundation trusts. 
 Returning specifically to clause 11, I repeat my question from some time ago; how will the grant regime differ when a NHS trust becomes a NHS foundation trust? The Minister made the point that we must keep that in perspective, given that the capital allocations are relatively small compared with the revenue. North Hampshire hospital's capital allocation for the current year is £2 million, whereas its revenue expenditure is in the region of £100 million. 
 I think that I heard the Minister say that operational capital is allocated three years in advance and will not be clawed back if the trust becomes a foundation trust. He went on to say, however, that that only accounted for some 25 per cent. of the capital allocation, leaving unanswered the question, to which I will return in a moment, of the other 75 per cent. 
 The Minister said that a foundation trust would continue to be eligible for a range of grants from his Department. He mentioned national initiatives for the national service framework and touched on an IT strategy. However, I, and directors of finance up and down the country, assume that foundation trusts will not continue to receive from the Department all the capital that they would have got had they not become foundation trusts. It would be helpful if there were some body language from the Minister that confirmed or denied that assertion. 
 I assume that foundation trusts will not receive the total flow of capital from the Department that they used to get, but will be invited to use the facilities under clause 12 to borrow from alternative sources. I know that financial directors up and down the country are asking that question because they are trying to work out whether they would be better off going down the foundation trust route, which would mean forgoing an element of capital but receiving more from the facilities that I will come to in a moment.

Chris Grayling: My right hon. Friend puts his finger on an important point. If foundation hospitals represent a genuine way to expand the capital available for foundation trusts, they will be able to enhance their services. If, however, the introduction of borrowing powers is simply an opportunity to replace money that currently comes from central Government, it will not generate improvements in patient care in the hospitals concerned.

George Young: The best way for the Minister to resolve the matter is to take the case of a typical hospital trust and tell us what would happen if it were to become a foundation trust, how much of its existing capital it would continue to receive and what proportion it would no longer receive but would be expected to get through the new route that is being opened up under this part of the Bill. If the Minister were able to do that, he would answer my hon. Friend's question and mine.
 My final point is more fundamental. The original concept was that private borrowing in which the trust is engaged would not score against the departmental baseline, but would be incremental and increase the 
 total amount of capital invested in health. That battle was fought and lost. We now know that borrowing privately will score against the departmental total. I was slightly alarmed this morning when the Minister said that when the Bill is passed, he does not expect a huge amount to be lent from what I would term the ''private sector''; banks and the City. Instead, he described a new NHS financing facility. That would be the route down which trusts will go for capital. 
 The Minister explained that that would be kept at arm's length from the Department, and would be operated by independent credit specialists who would assess the loans using normal credit analysis. However, in response to my hon. Friend the Member for Epsom and Ewell, he then said that it would be funded by public expenditure; it would come from his Department. If that is the case, we have gone round in a complete circle. 
 As things stand, a non-foundation trust would get its capital from the Department. However, it seems that if such a trust went through the hoops to become a foundation trust, cleared the social ownership hurdle and the regulatory hurdle and was given a prudential borrowing limit, it would not go to the City for funding, which is what I thought would happen, but would go back to the Department. Having jumped all of those hurdles, the trust would get its money from the Minister. We seem to have travelled in a complete circle. 
 I hope that the Minister will disabuse me of that view, tell me that I have totally misunderstood what he said this morning and say that the situation is not as I described. However, if it were as I described, far from diminishing the regulatory burden, we would have substantially enhanced it. We must press the Minister a little more on how the new regime would work. There must be absolute clarity as to how that would benefit both the Department and the trust that goes round the course.

Andrew Lansley: The Minister gave a rather expansive response to the earlier stages of the debate, and I fear that in the course of doing so, some of my more detailed questions were lost, so I will return to them. They follow on directly from the point made by my right hon. Friend the Member for North-West Hampshire; in that context, we can apply the situation to a particular hospital. I know what the sources of capital are for Addenbrooke's NHS Trust by virtue of reading their board papers, which are public documents.
 I want the Minister to help us, step by step, to understand the Exchequer contribution to NHS foundation trusts, because that is what clause 11 deals with. I referred to the contributions earlier, but I will go through those again to avoid any doubt. 
 First, I shall address the matter of operational capital. Again, to avoid doubt, I referred to the bids for capital inside the trust, compared with the capital available and was speaking about the operational capital. The bids for operational capital inside the trust are £22.5 million. The amount that is to be allocated—there is some overcommitment—is £7.5 million. The 
 block allocation to the trust for 2003–04 is around £6.9 million. 
 As the Minister told the Committee, those are three-year allocations. Therefore, we have allocations for 2003–04, 2004–05 and 2005–06, and we have heard that those would not be clawed back. However, what would happen after that? What would happen to the block allocation of operational capital after 2005–06? Would it continue to be made by the Department to an NHS foundation trust in the normal way, or would it become part of the trust's requirement for borrowing? 
 The Department has given certain approvals to the trust through its discretionary capital schemes, which are now called strategic capital schemes. I will not go through what those are, but there are several others in the pipeline. Would the discretionary capital schemes, or strategic capital schemes, continue? Would they continue to be funded directly by the Department, or would they become part of the capital investment for which the trust would need to secure support through the financing facility? 
 We know that there is a three-year access fund arrangement. The Minister might reasonably tell us that that is available for allocation by strategic health authorities. It might, or might not, follow the three-year programme, but presumably NHS foundation trusts would not be excluded from having the access fund made available to them during the three-year period. I hope that that is agreed. The same applies to modernisation funding. There are specific objectives—ministerial priorities, as it were—and if they apply across the NHS, foundation trusts will have access to those funds in the same way. 
 I asked a specific question about three-star trust status. In 2002–03, £1 million was delivered to the Addenbrooke's NHS trust because of its three-star status. We do not know if that status will give rise to another capital allocation of £1 million for 2003–04, or some different sum. We are now in the 2003–04 financial year, and we have to assume that the Addenbrooke's NHS trust's capital programme is not receiving such an allocation.

Chris Grayling: Another capital element of the trust to which my hon. Friend, the Member for South Cambridgeshire referred, and others with which we will come in contact over the next two to three years, is the national IT programme. The Minister's clarification would be appreciated as to how that will be handled in capital terms for foundation trust hospitals as, clearly, it will impact upon the balances of the Addenbrooke's NHS trust over that time.

Andrew Lansley: Yes. We could go into detail on the matter, but it is likely to form part of the modernisation funding stream to which I referred previously. The relevant document for the Addenbrooke's NHS trust states that
''In addition, the Trust hopes to obtain funding from the national IM&T programme, although this is yet to be confirmed.''
 My hon. Friend the Member for Epsom and Ewell asked the question, but we do not know yet. My assumption is—if I am wrong I hope the Minister will 
 let us know—that in so far as the foundation trusts participate in the programme and incur capital expenditure, they will receive modernisation funding from the Department in the same way as other NHS bodies. Those are the questions that relate to the sources of Exchequer funding. 
 We have discussed the link to the national tariff, and the question is to what extent are NHS bodies going to be treated on a like footing. My hon. Friend the Member for West Chelmsford also touched on the matter. If the national tariff and the price that is paid by commissioning bodies to all NHS bodies are to be on an equal basis, they will in all cases include not only the costs of the provision of a service, but all the associated capital costs. 
 Section 3.7 of ''Reforming NHS Financial Flows: Introducing payments by results'' of October 2002 states: 
''This initial set of tariff rates will be derived from 2001/02 NHS reference costs.''
 Simply put, what will the tariffs be, based on those reference costs? In economic terms, will they be short-run incremental costs, not reflecting, therefore, the long-term cost of capital associated with the provision of particular services; or are they going to be on a long-run incremental cost basis? We may get on to the argument later, but I will not disguise my feeling that the tariffs have to be based on long-run incremental cost for NHS foundation trusts if they are to sustain the costs of borrowing capital to put additional capacity in place. 
 If they are all on the basis of long-run incremental costs, do they not, of necessity, involve a misallocation of resources, as, in some respects, commissioning bodies will be buying spare capacity? The Minister reminded us that we want to use up underused capacity; certainly not at the Addenbrooke's hospital, which has 98 per cent. occupancy levels, but we will leave that on one side. Surely underused capacity ought to be able to be offered by providers on the basis of their marginal cost, and should not be bought by commissioning bodies on a long-run incremental costs basis. The risk is that we will generate surpluses in less efficient and less popular locations in the NHS, using up their capacity and giving them surpluses that are unrelated to cost. Prices ought to be reflective of cost and there is a risk that, in this case, that will not be the case.

Evan Harris: We have had an interesting debate today. I suppose we ought to be grateful to the Minister for his exposition of the new flows of resources within the national health service.
 When we arrived today, we could have been forgiven for thinking that when we reached the stand part debate on clause 11, we would have a response from the Minister. The hon. Member for South Cambridgeshire asked many questions; he has asked them again, although he has added a few more, following the Minister's comments. I thought that we would have a response from the Minister to those issues, then a brief clause stand part debate, and then we would move on to the issue of capital in clause 12. I have tabled an amendment to clause 12 that must be 
 addressed, and other hon. Members have also tabled amendments to that clause. 
 I suppose we should be grateful to the Chairman for allowing a long discussion of the new approach to commissioning and the question of having a volume-led or activity-led approach, rather than a cost-based approach. However, if that was the plan, it would have been helpful had we realised how detailed the debate would be. As the Minister said, documents that many of us read last October are available on the web site, although he did not specify the web site address. 
 We would have benefited from knowing in advance that we might want to read—I see that some more documents have arrived on the Table since 2.30 pm—the 50-page document, ''Reforming NHS Financial Flows'' that was published in October 2002. It would have been helpful had that been provided for Members to re-read for this debate. We may also have wished to re-read the response document and the series of specific questions before this debate. 
 It is unfortunate that I was not alerted that we would have the opportunity—which I will certainly take—to address some of these interesting questions that the Minister has raised. In response to our debate this morning, a three-page document produced by the Department of Health was placed on the Table. It is entitled ''Information sheet No. XX'', which implies that it is very new. It gives us a little more information than we already have in these couple of hundred pages. 
 Nevertheless, the Minister has given us a valuable chance to question the Government about this matter. However, his contribution raised more questions than it answered. The first question is about the position of those who are able to retain the surplus. In my intervention on the hon. Member for Epsom and Ewell, I said that it might be possible to know the answer if the Minister clarified the position in a response to my intervention. 
 However, as hon. Members will be aware, in the document ''Specific Questions, Annexe C''—a response to the consultation produced last October, entitled ''Reforming NHS Financial Flows''—that is one of the key questions raised in the consultation. The answer is not entirely clear. Paragraph 20 on page 33 of annexe C of that document asks whether trusts will be allowed to keep a surplus as a reward for efficiency. Will there be rules governing how such surpluses should be split? What will be the rules governing retention of trust surpluses? If trusts are able to retain surpluses, will they be allowed to carry them over to the following year, or will they be received in the following year? 
 Those are interesting questions. In a debate on foundation trusts, one can double the number of questions by asking what is the case for foundation trusts and for non-foundation trusts. Since the Minister raised this question in the clause stand part debate, one would have thought an answer might be forthcoming. I am still hopeful. 
 However, the response given in the document is that the issues around how surpluses should be split, and 
 the mechanisms to be used in allowing trusts-PCTs to carry forward surpluses, are to be considered as part of a wider review of the trust financial regime and PCT financial framework. The trust will look at various things; break-even duties, brokerage, special assistance under the new financial flow system, risk management issues and possible medium-term roles for an NHS bank. It continues that the review was expected to report by September 2003. 
 That may give another place the opportunity to debate some of the questions that have been raised in our debate today, but before this Bill passes into law and becomes an Act. 
 I fear—unless the Minister is able to prejudge the response to that review—that that will not enable us to get answers today, nor will it enable us to consider how the establishment of foundation trusts relates to the answers given to those questions. Although we are grateful to the Minister for allowing us to question him and to hear his exposition, I suspect that he is being a little tantalising. I fear that he will be unable to answer some key questions, unless, for the first time in the recent history of the Department of Health, a review is able to report any time earlier than the indicated date. I fear, from the Minister's lack of response by way of intervention, that we are not going to get answers. 
 In that sense, it is hard to understand why we are having this debate on foundation trusts. Can the Minister say whether we will have an opportunity to come back to the matter in hand? I should have thought that that be addressed in his first comments on this section. 
 I have several specific questions to ask about the new financial flow. I was disappointed by the Minister's earlier response to one of my interventions. In his contribution, he said very little about how that would benefit patients directly, and very little about how quality would be levered up. It may come as a surprise to him to know that I believe there to be some merit in these new financial flows. It is important to allow the commissioning process to focus on something other than cost. Clearly, with the overwhelming focus on cost, there is no opportunity to consider some of the other things that are important, such as responsiveness, quality, getting capacity in quickly and flexibility for commissions. 
 I was trying to support the Minister when I said that I recognised that it was important that commissioning must be made more flexible and not just cost-driven. That was met with the response that it was well known that I supported the provider interest. I do not know where that came from; I question whether it was justified. It might have been good knockabout stuff, but I thought that we were having a serious, non-partisan debate about the potential benefits that might flow from the reforms to the commissioning process that the Government are proposing. 
 It was a bit of a cheek to answer what I thought was a reasonable question about equity with the rather partisan response that the approach that we have to commissioning, or to the health service, is 
 conservative, even with a small ''c''. I do not believe that to be the case, nor do I believe that this debate is an appropriate place for the Minister to make those allegations. If it were otherwise, I would be allowed to answer them. 
 The question is; how will this help the patient, and what are the potential perverse incentives that may flow from some of the proposals? I do not know whether the Minister recognises, as I do, that in any change like this there are risks of perverse incentives. There are questions that must be answered about what this will do for equity, for quality and for genuine patient choice, particularly for those patients who do not have the flexibility to follow contracts or financial flows around the country, and who rely on being treated in their local hospital where they can be visited by their family and where they have had continuity of care throughout their illness from existing providers. 
 The Minister said that the tariff would be derived from 2001–02 reference costs and, in response to something that I said, told us that there would be adjustments for projected cost inflation and local market forces factors; he made specific reference to the south and the south-east. Clearly, labour costs are higher there, but I worry that that will not be sufficient to compensate for the actual costs of delivering the capacity required to meet the needs of the health service. 
 In the Oxford Radcliffe hospitals trust—one of many—it is not that NHS nurses have to be paid more in wages or extra living costs, or that the trust has to arrange additional investment in childcare facilities in order to compete with other employers that do that better than the NHS. Up to three times over the odds has to be spent on agency nurses. That sort of cost pressure is vastly more than what the Minister described—I hope that I am not misquoting him—as ''some adjustments for local market forces factors''. 
 In my trust, the percentage increase in the cost of providing services has been huge because there are simply no nurses available locally, which is part of the reason why the trust has such a huge deficit. An approach that does not adequately compensate for that state of affairs, regardless of who is to blame, would spell even further disaster for a trust in such a position. Such hospitals are kept afloat by local commissioners, who are pretty much bound—at least in the short to medium term—to purchase services from them. Sadly, they must try to meet, as far as they can, the additional costs that that implies. 
 I should like the Minister to give an assurance that the position of those trusts will be recognised. Perhaps it is a clause 11 matter; perhaps there will be direct financial assistance to such trusts. I know that an announcement was made a few weeks ago about a pot of money taken from the NHS to be allocated by the Government. Providing local commissioning and purchasing flexibility is a step forward, but the Minister must accept that too large a centralised structure is a step backwards. It may be necessary, but it is not the brave new world of uniform improvement 
 in the devolution and decentralisation of commissioning decisions that the Minister proclaims. 
 The NHS Confederation's response of November 2002 to the financial flows document contains a paragraph on quality, which was not properly addressed in the original consultation document of October 2002. Indeed, ''Frequently asked questions'' is the shortest section in the document. There is very little in it about patient issues and quality. The NHS Confederation, which is as enthusiastic for reform as we are, recognises the following: 
''There is no reason why a fixed price system should by itself create improvements in quality except where improvements may reduce costs.''
 It also states, although I find the view regrettable, that: 
''Experience suggests that reliance on external inspection will also fail to make sufficient impact''
 on quality. I will be grateful if the Minister told us whether anything in the new arrangements would persuade me or the NHS Confederation, which will be running the system, that there will be a direct impact on quality from the financial flows alone. Will the Government set up and fund properly a system of audit available for local commissioners that does not rely on annual reports from the Commission for Healthcare Audit and Inspection or on other, more long-distance, means of measurement? 
 There are concerns about how emergency care will be treated under the tariff system and how complex, chronic disease will be managed. The Government say that they will start with elective surgery, and the healthcare resources groups that they have set up are mainly in the field of elective surgery. Simply starting with the low-hanging fruit does not explain how the system will be translated into the management of chronic disease and emergency care treatments. That will be much more difficult to cost. I am not sure that experience in elective surgery will help to do that. We must work out whether it will be possible to do that without creating distortions. The NHS Confederation in its response, under ''Designing a meaningless system'', says: 
''There is a danger that the new system will become an accountants' and information specialists' 'anorak-fest' of impenetrable rules and massively overspecified detail with little connection to clinical practice and no chance of engaging clinicians.''
 The confederation says that the system must be driven by a desire to improve clinical practice and patient outcomes rather than by an obsessive search for the perfect system. The Minister must address that, as he said very little about a desire to improve patient outcomes and a great deal that was in danger of straying into that anorak-fest. 
 The Minister may say that that does not sound like a positive response to the document, but one of the duties of Opposition politicians is to point out potential drawbacks; the Minister did not suggest any in his exposition. The fact that there may be drawbacks, distortions or perverse incentives is not an argument for not moving forward, but it is an argument for clearly addressing those problems in advance. I hope that the Minister does not think that because I have concerns about the impact of the proposals that I am against reform; on the contrary, I 
 believe that the proposals may be of some benefit. I hope that when I mention some potential perverse incentives, he will not consider, as he tends to do, that I have taken a negative or conservative—with a small or large ''c''—approach to his suggestions. 
 The NHS Confederation states: 
''Creating a system that incentivises admission for conditions can and should be managed on an ambulatory basis. Payments and activity targets for conditions such as asthma, heart failure, and so on will need to be capped and even have penalties for high rates of admissions or rewards to incentivise admission reduction.''
 That is clearly a potential perverse incentive to generate activity and the need for capacity to attract contracts. 
 The confederation states: 
''Since the HRG price is significantly determined by length of stay, providers that can treat patients in less than the average time can make a profit. Experience in other systems suggests that this gives incentives to discharge early.''
 That is a concern because incentives to discharge early already exist in the form of fines for delayed discharges. That will go against patients' best interests.

Andrew Lansley: The hon. Gentleman is taking the trouble to explore the issues associated with the introduction of the full tariff. I do not want to underestimate the difficulties, but this measure would be introduced alongside patient choice. Therefore, although I will explore the financial impediments to commissioning on the basis not only of cost to volume, but to quality, it is important to recognise that the roll-out of patient choice will in itself offer an opportunity to deliver quality.
 The hon. Gentleman mentioned problems. However, some trusts are tackling the level of accident and emergency care and so on. For example, the Addenbrooke's trust is entering into further risk-sharing agreements with primary care trusts so that the risk is not simply associated with extra activity on the part of the hospital. Equally, those costs do not necessarily flow back to the PCT if the hospital simply takes on board everybody who comes to it.

Win Griffiths: Order. Members must make short interventions.

Evan Harris: It is difficult to contain the scope of this debate within short interventions, as has been shown by the hon. Gentleman. Some of the questions that he asked generate yet more debate. Since the Minister did not stray into patient choice, I will not either, except to say that patient choice based on proper information would be a welcome introduction. Patient choice is often used as another term for better access, but better access is better access; it is not the same as patient choice. That is an important point. When the Secretary of State talks of patients wanting the choice of a good local provider, he means patients having access to a good local provider, and not their choosing between good local providers.
 When I first asked how equity would be preserved within these financial flows, the Minister started off on one about producer interest and so on. However, this 
 is not a producer interest issue. The Committee will know that it is difficult enough to preserve equity within the existing system without introducing new systems. At first sight, the new systems might appear to be more equitable because of any advantage that foundation trusts will have over non-foundation trusts or those providers, regardless of their foundation status, in terms of labour costs and other costs. 
 What provisions is the Minister making to explore the impact on equity for those patients who are not in a position to go with the flow? It would not be fair to patients if they were made scapegoats for so-called poor performers. What provisions are in place to ensure that trusts that are classed as poor performers—for reasons beyond their control or because of bad management—preserve the resources needed to provide a decent service for those patients who are not in a position to move? I am referring to patients with chronic diseases and patients who require emergency care. Such patients cannot travel from Oxfordshire to Skegness, even if there is extra capacity there and their PCTs can negotiate the tariff to treat more patients quicker. 
 There is also the question of how the arrangements will apply to people with complex mental health problems, who need the social support that is achieved locally. It may not be appropriate for the Minister to answer all those questions, but I ask that when they are raised, he does not see them as coming from an anti-reform point of view, but as a constructive approach to addressing problems in the introduction and piloting—I am glad that the scheme has been piloted in 15 areas—of the new financial arrangements in the NHS.

Stephen Pound: Although I am anxious to avoid giving the impression of being helpful, I should like to take issue with one of the points that the hon. Member for Oxford, West and Abingdon raised.

Jim Dowd: Only one?

Stephen Pound: I will restrict myself to one.
 There is a real danger in debates such as this of us assuming that, implicit and inherent in the starting structure of any national health service, is an increasing and stratified demand for agency nursing. Agency nurses are a significant factor in the cost of the NHS, and I entirely understand why the market forces factor contains in the index an element for the consideration of localised staff costs. However, I am desperately anxious to avoid us assuming that this will always be a problem in the national health service. 
 The problem is not that there are no nurses but that, in many cases, the hours available for those nurses to work did not suit the nurses, or adequate accommodation was not available, or the factors that the nurses took into consideration were not recognised. 
 I make no bones about admitting that I have a sentimental attachment to a health service run by Hattie Jacques and would be happy if that were the case now. On the other hand, I recognise that many aspects of the Bill are sensible and, given the Minister's reply, the idea of adjusted payments makes a lot of 
 sense to the untrained eye. It seems to be logical and sensible, as does the structure of the diagnosis-related groups and the various other mechanisms in this transparent method of payment. 
 Like all hon. Members, except possibly the hon. Member for Oxford, West and Abingdon, I have studied with great interest the research projects by La Trobe university, Melbourne, and the University of New South Wales, as well as the various analyses of experiences in Victoria and Denmark. In many ways, we are quite fortunate; the nasty work has been done for us. We know what the problems are. 
 I assure my right hon. Friend the Minister that even some of us on the troglodyte wing of the Labour party see a great deal of good in this method of payment. However, there are two issues that I want to raise. First, the mechanism is fine, but inevitably the argument will be about the amounts. The last major reorganisation of health care in my part of the world took place as long ago as April 2002, when the Ealing PCT was created.

Andrew Lansley: Clearly the hon. Gentleman has been following these matters carefully. Will he explain how he thinks the Department will deal with what is termed in Victoria as DRG creep, but for us might be termed HRG creep?

Stephen Pound: I should be delighted to. If the hon. Gentleman analyses the DRG creep to which he refers, he will see that the specific movement within the categories and the diagnosis-related groups was addressed in the first analysis. We now know how to structure the software to pick this up. If you look in the paper which was published in October last year, you will see, within the various categories, where that break took place and particularly in consultant related episodes, finished consultant episodes. All the work has been done for us, so we are now in the fortunate position of being able to say that this has been tried and tested and that we can now make use of them in a different context.
 However, two specific issues arose with the last major organisation of health service provision in Ealing in April 2002. One of the problems with the establishment of the PCT—I should like the Minister to address this when he comes to reply—was the deficits that existed at the time. In the Ealing PCT we have a deficit of 3 per cent. based on 2003–04 figures, and that is about £8 million. All three PCTs in my area have a deficit. How can we avoid going into a foundation hospital system with an inherent deficit? That worries me, because if we are going to assume that there will be an element of deficit, as was the case with the PCTs, that could be extremely worrying. 
 Somebody mentioned certain areas of commissioning which would not be the province of the foundation trust, and I think IT was referred to, with those involved signing up to a national IT system. Can the Minister say whether this will be so or whether I misheard that? Will there, for example, be a national system for patient data storage and retrieval; maybe even for the analogue transmission of data such as x-rays? Will that be one for which money is given and 
 then retrieved, or will there be an element of local choice in IT?

John Hutton: Mr. Griffiths, you were not with us earlier today when we had this discussion. It does seem to me—other hon. Members may feel the same—that we have had a clause 10 stand part debate for clauses 11, 12 and 13, and I hope that that is your view, too.
 I have arranged for two documents to be available on the Committee Table, one of which is a copy of the financial flows paper. The hon. Gentleman for Oxford, West and Abingdon asked about the web site address; it is www.doh.gov.uk/nhsfinancialreforms/financialflowsdec02guidance.htm, and I am sure that he will want to refer to that, too. The other paper is one that I have asked the officials to prepare, and I am grateful to them for having done it so quickly. It sets out by scheme an overall view of the NHS financial reforms and results, and I hope that that will help us. 
 Many hon. Members have asked about how the new financial flows arrangements will apply specifically to NHS foundation trusts. I wish to tell Members that I have asked for further briefing papers to be available to them as soon as possible, and I hope that I will be able to send them to Members of the Committee in time for our resuming after the recess. 
 This has been a high quality and well-informed debate. The hon. Member for Epsom and Ewell asked me about classification, and whether NHS foundation trusts' borrowing would be on or off-balance sheet. That is not actually a decision for Ministers to make; that is entirely a decision for the Office of National Statistics. It is not something that I am in a position to answer.

Chris Grayling: I accept that it is not the Minister's decision, but does he know the answer to the question? Has the decision been taken, or is it still to be taken by the Office of National Statistics?

John Hutton: The decision is still to be taken, so I will not be offering my views on that now.
 A very important discussion then took place about the use of surpluses. I did make it clear in my opening remarks on clause 11 that we want NHS foundation trusts to be able to retain any surpluses under the new national tariff system that we are introducing. That is an important result for NHS foundation trusts. 
 It has been made clear in the papers forwarded to the Committee and Ministers' remarks that the Department is reviewing the question of the retention of surpluses for non-NHS foundation trusts. That is happening as we speak. I hope that the Committee will understand that my position is difficult. In respect of those trusts that are becoming NHS foundation trusts, we have not yet decided how the system will operate during the interim period. We want to examine that very carefully. We do not want to hold back progress across the NHS as a result of any changes we make to the flow of finances. I am sure that that important issue will bear on Ministers' minds, and my right hon. Friend the Secretary of State will look at it very carefully. 
 A very important part of the speech of the hon. Member for Oxford, West and Abingdon concerned a perfect system of distributing money in a publicly funded health care system. There is no perfect system. There are better systems than the one we have. For the reasons I outlined this morning, our system is a blunt tool. It does not reward the efficient and the effective, and it does not incentivise the right kinds of innovation and development that we all, with common consent, want to see in the NHS. We have a crude instrument, and the reforms we outline will be a significant improvement. 
 However, I emphasise a point that will provide a context for some of my later remarks. In developing our policy on NHS foundation trusts, we have been motivated essentially by two important considerations. One is a belief that, if we want the NHS to continue to improve and provide better patient services—the financial flows reforms and our proposals on NHS foundation trusts will help in that—we must devolve responsibility and decision. That must include responsibility and decision-making in financial matters. We must move away from the current position, particularly in respect of capital, where the available pot of money is rationed and people queue for a share of it. 
 I hope that, over time, the system will become a more commercial model. Although there will be greater disciplines, the system will retain its public service ethos and principles, and that is important. The system of distributing capital resources across the NHS will be more rational and utilitarian. We do not have such a system at the moment. The issues are closely related. 
 The hon. Member for Oxford, West and Abingdon and others were concerned about whether these reforms—not in the Bill but in terms of financial flows—would improve patient services. I believe passionately that they will.

Chris Grayling: Although I accept that the Minister cannot prejudge the work that is taking place in his Department, can he confirm that, under the current system, non-foundation trusts would have to return any surpluses they generated under the tariff system to the consolidated fund, to his Department or to the Treasury?

John Hutton: Broadly, at the moment they cannot retain those surplus assets. That is partly because of the application of the accounting arrangements by the Department. We are looking at that. I am not in a position to tell the Committee what the outcome of the review will be, other than to say that, in making all of these reforms and in moving as quickly as possible to foundation trust status for all parts of the acute sector—specialist and trust—we do not inadvertently hold back parts of the service.
 We want to reach a point where everyone can take advantage of these new freedoms, because I am confident that that is the best way to sustain the improvements that have taken place in the NHS. I believe strongly that, in devolving responsibility for 
 planning, developing and delivering health care to clinicians and local people, we can take a forward step in improved quality care. The corollary is that financial reforms are necessary. Responsibility and decision-making on the use of capital resources currently rests with my hon. Friend, and that must be handed over to local providers. Even with that greater sense of freedom, there must be a broad framework of financial discipline, because no organisation can operate without a proper, prudential financial system. 
 We are not legislating for anarchy, or for a free-for-all; we are not legislating to create a situation in which the NHS goes bust. That would be the daftest thing we could create. The Bill does not do that. The Opposition wants to remove the provisions about borrowing limits and so on, and we will debate that later. However, there is a case to be made for that sort of framework. 
 The hon. Member for Oxford, West and Abingdon and others asked how these financial reforms will improve patient care in foundation trusts. I have dealt with that point. In relation to the point that was made about whether moving to HRG costing and the national tariff will somehow undermine quality, as my hon. Friend the Member for Ealing, North (Mr. Pound) made clear, in a very effective and well-informed contribution, that is not the case in other countries that have moved towards developing a system like this. We are able to learn from the experience of others; for example, Germany, the Scandinavian countries and Australia. There is no evidence from those countries to suggest that HRG tariffs result in deteriorating quality; in fact the opposite is the case. They have seen improvements in both choice and speed of delivery of care. We are now out of step with others on these reforms, and we should not delay any further in moving down that road.

Evan Harris: Surely the Minister must recognise that one of the broader questions, which may not be particularly detailed, is whether the creation of foundation trusts is creating not only a two-tier system, but a two-tier system that is more unfair than the sort of ''tierism'' that one gets from allowing different providers and a mixed market.
 Will there be greater financial freedoms for foundation trusts than non-foundation trusts? That is particularly important, as the Government are not allowing any trust to have a financially free status—as we would—but are selecting them on the basis of the matters we have been talking about in the clauses to date. Does the Minister understand that it is extremely frustrating to my party—and, I would have thought, to some of Labour Members—not to know until the review is complete how great an advantage a foundation trust will have on retained surpluses compared with non-foundation trusts; at least in the interim period, until every hospital, as he sees it, is a foundation trust?

John Hutton: The hon. Gentleman is putting the cart before the horse by announcing the outcome of the review that is currently taking place. We have not come to a decision about that, so he should not jump
 on that issue. It is true in other respects that NHS foundation trusts will have greater financial freedoms, including the ability to borrow from a wider range of sources, including the private sector. That is an important freedom, and our case in this regard is that it is justified by their financial performance to date. They are institutions with a proven track record, and they have earned the autonomy and the freedom that goes with it.
 In relation to the use of surpluses, which was the recurrent theme of several hon. Members' questions, we have not come to a decision about what to do about non-NHS foundation trusts. That work is being done. 
 I was asked to provide more details about the new financial facility for lending to NHS foundation trusts and what, if any, were the limits to that capital financing. There will not be a finite pot determined by a fixed sum. The finance facility will have access to an amount equivalent to the total limit of NHS foundation trusts' aggregate borrowing, which will be determined by the regulator as he develops the prudential borrowing code. NHS foundation trusts will have access to the capital resources that are needed to allow them to borrow in accordance with the authorisation and the upper limit of borrowing set by the regulator.

Chris Grayling: If the Department is, as I assume, providing a financial facility that amounts to the total aggregated borrowing rights of the foundation trusts, is the Minister saying that there is a possibility that there will be no new money coming in from the private sector at all, and that this is basically just a different vehicle to provide public sector lending to the foundation hospitals?

John Hutton: I want to talk about the source of funding in a minute, because the hon. Gentleman's right hon. Friend the Member for North-West Hampshire (Sir George Young) asked me about the future source of strategic and other forms of capital available to NHS foundation trusts. Maybe I should combine both of those points now. We have made capital allocations for the next three years, including strategic capital allocations, to all NHS trusts, including those that have applied for NHS foundation trust status, and we will honour those strategic capital allocations.
 There will be no clawback in relation to the capital allocations that have been announced. The Government will honour the commitments that those allocations reflect. However, in a time beyond the spending review settlement the new arrangements will mean that public money will be allocated on an ability-to-repay basis from either the financing facility to which I have just referred, or from the private sector, which has expressed an interest in financing foundation trusts. The Government expect that interest to grow over time. 
 This morning, I clearly stated that in the short-term the financing facility will provide most of the additional capital borrowing to meet the capital requirements of foundation trusts. However, we think that that position will change over time.

George Young: I think that the Minister said that the sum that could be bid for by the foundation trusts would be capped at the limit set by the regulator. Does that mean that the regulator—by using the criteria that we will come to—might be free to fix a sum that could be beyond what the Chancellor of the Exchequer or the Secretary of State felt that it was reasonable to spend on health, and would there be no constraint on the regulator in arriving at the figure that he felt was the prudential borrowing limit for the foundation trusts?

John Hutton: That is an important question. I could deal with it later when we come to the clause dealing with prudential borrowing, but it would be fairer to the right hon. Gentleman if I dealt with it now. Under clause 3, the Committee considered the regulator's duties. Clause 3 makes it clear that the regulator must take into account and apply his powers and functions in a way that is consistent with the Secretary of State's duties under sections 1 and 3 of the 1977 Act. That means that the regulator must have regard to the effect on the overall allocation of resources across the NHS of his drawing up of the prudential borrowing code. Therefore he will have to have regard to the overall amount of capital financing available in the NHS. The freedoms that we are giving to foundation trusts are a significant step forward. This is a different approach; it will be a more commercial approach to capital financing in the NHS. Ultimately, that will be a good discipline for the NHS.

Chris Grayling: We may be trespassing on the later stages. The Minister should think about this from the current time frame where the initial facility from the public sector will match up to the total gross borrowing powers of all the foundation trusts, and that total facility has to bear relation to the overall amount of capital financing available to the NHS. It does not take into account the extra ability of the private sector to provide additional resources to the NHS, nor does it take into account future investments against which borrowing might be secured. It would therefore appear to place a cap on the ability of the foundation hospitals to develop linked to the ability of the NHS to pay and not to the private sector to lend to them.

John Hutton: I am sure that the hon. Gentleman is aware of the agreement and the position that we have reached on capital borrowing and how it scores against the Department's capital budgets—and that includes private sector borrowing. All that has to be taken into account because that is how we intend to operate the prudential limit. It does not matter if the capital is from the private sector or public sector. It scores against the Department's balance sheet. That is also a factor that the regulator will have to consider.
 My hon. Friend the Member for Ealing, North asked about deficits. That is an important point. We have asked applicant trusts to make a case where they believe historical deficits should be written off before they achieve foundation trust status. We will look at that on a case-by-case basis, but we are alert to the issue that he has raised. My right hon. Friend the Secretary of State is also considering whether there is 
 the possibility of a PCT deficit write-off as part of the application process. 
 The hon. Member for South Cambridgeshire asked about long or short-run average costings as part of the move to the new national tariff system. He probably knows what I am going to say because he has been carefully pursuing this with some of my officials. The tariff will cover all the costs of delivering a high quality service. Those costs will include the costs of staff, drugs, medical supplies and the running and maintaining of NHS buildings. 
 The assumptions underpinning the tariff will be the same as those reflected in allocations to primary care trusts. The inflation assumptions applied to the tariff will be the same as those that informed PCT allocations. We are trying to calculate the national tariff on a fair, open and transparent basis, attempting to reflect the costs of providing those services.

Andrew Lansley: To return to a point that was touched on briefly on Tuesday evening, will the Minister acknowledge that the national tariff system, with the costs constructed in that way, does not permit a trust with spare capacity to price it at marginal cost in order to use up that capacity, as distinct from having to charge their long-line average cost?

John Hutton: That may be true, but I do not know. I may need to come back to the hon. Gentleman on that matter.

Evan Harris: The Minister has not mentioned the way in which the independent sector will behave within the tariff arrangement. What is to stop that sector from charging less than the tariff, particularly for easy cases, leaving the NHS with the difficult cases. Some purchasers, desperate to find ways of obtaining capacity so that they are not labelled a failing commissioner by the Government, may be willing to pay that sector over national tariff for the NHS, allowing it to use the extra resources to compete in a way that the NHS is unable to respond to because it is constrained by the tariff? At some point, the Minister will have to clarify how there will be fairness in a market between the independent sector and the NHS with an NHS tariff arrangement.

John Hutton: I am not quite sure whether the hon. Gentleman is saying that the national tariff should not apply to private or independent sector providers, but that seems to be the logic of what he is saying. I am not sure if that would guarantee fairness in the context of a plurality of providers that we expect to provide services to NHS patients. The national tariff is the way to guarantee fairness across the system. I do not see how the introduction of the national tariff would introduce unfairness or give an unfair advantage to the private sector. It is certainly not how the private sector sees the introduction of the national tariff.
 The hon. Gentleman makes a point in his intervention, but it is a very odd point for someone from his political wing to make. I am not sure what political wing he belongs to—he was on the centre left a moment ago, but that intervention would seem to indicate that he is on the centre right.

Win Griffiths: Order. We are going down a path that is far beyond clause 11. There are later clauses where that particular nicety could be tackled. Therefore, we will carry on with the main debate.

John Hutton: I am grateful to you, Mr. Griffiths, for rescuing me from that divergence.

Andrew Lansley: We will not have another opportunity to examine the structure of the national tariff, which is part of the whole question of Exchequer funding of the NHS as a whole. The implication of the Minister's response to the hon. Member for Oxford, West and Abingdon was that the standard tariff would be applied to purchasing from the independent health sector.

Win Griffiths: Order. Is the hon. Member asking this question in relation to the expenditure of an NHS foundation trust or in relation to grants being given by the NHS centrally? His reply will determine whether I shall rule him in order.

Andrew Lansley: My submission is that this relates to the financial assistance given by the Secretary of State to NHS foundation trusts. In this instance, the NHS foundation trust in question might be an independent provider who has become a public benefit corporation in order to become an NHS foundation trust.

Win Griffiths: Does the hon. Member wish to pursue this matter in that circumstance?

Andrew Lansley: In that circumstance, the question is whether independent providers, who have, presumably, come into the NHS system to sell additional capacity that they are unable to sell privately, would be able to sell it at a marginal cost. The perversity of that system is that the NHS would insist on paying independent providers at a standard tariff, even though independent providers would be willing to charge marginal costs that may be below the standard tariff. Is the Minister seriously asserting that principle?

John Hutton: Clause 11 concerns grants and loans—the capital revenue side of the funding for NHS foundation trusts. However, the national tariff is not financial assistance. That question relates to revenue resourcing of the NHS.
 The hon. Gentleman has raised the question of price competition several times, not only with regard to clause 11, but other clauses as well. That is essentially what he is arguing for: giving independent or NHS providers the opportunity to offer prices at a marginal cost. We will not do that. That is precisely what the national tariff prevents. The Opposition want to reintroduce price competition into the NHS. That is transparent from what the hon. Gentleman says, to which the hon. Member for Epsom and Ewell nodded in agreement. Fine. They are entitled to put that policy before the British people. However, we have been there before, and we know exactly what that leads to. It leads to the beggar-my-neighbour, dog-eat-dog culture that did so much damage to the NHS in the 1980s and 1990s. 
 There is a different way to promote productivity and efficiency in the NHS, and it is through the financial flows arrangements, coupled with the 
 national tariff, which I have suggested. There are incentives for providers to provide more efficient and productive services, and to use the surplus to re-invest in the provision of services. That is a powerful incentive to improve efficiency that does not exist at present.

Chris Grayling: Will the Minister give way?

John Hutton: I do not intend to give way again on those points. All of those questions on the national tariff go significantly wider than the terms of clause 11. I have tried to deal fully with the points that hon. Members have made.
 However, I want to deal with one other question on clause 11 concerning the Secretary of State's ability to provide financial assistance through capital and grants to NHS foundation trusts for the national information management technology strategy. We are putting considerable investment into that strategy. Primary care trusts will ensure that any contractual arrangements that they enter into with NHS foundation trusts require the use of the national strategy. Therefore, capital will be provided to sustain the strategy.

Chris Grayling: The Minster will be aware that the Government recently announced that they plan to shelve the shared financial services programme, particularly the accounting and purchasing systems, which I understood would be a bolt-on to the national programme. I gather that, due to the need to allow foundation hospitals independence in decision-making, the Minister can confirm that there will be no further extension of such a step, and that foundation hospitals will be required to take on all other aspects of the national information management technology programme that are not being developed at present.

John Hutton: The hon. Gentleman is wrong. Ministers have not made any such announcement about shelving the shared financial services initiative. We made that clear when that false report appeared in newspapers. The hon. Gentleman follows ministerial announcements closely on our website, so I am surprised that he asked me that particular question. That story was false.
 The debate has been interesting and wide-ranging, and I have nothing further to add to the issues that have been raised. I chastised myself after this morning's sitting for being so open in my opening remarks, and paving the way for what turned out to be a thorough scrutiny and investigation of the Government's financial plans. It is not often at the end of a debate that I can say that I feel thoroughly probed and scrutinised, but I feel that way at this moment. In the spirit of friendship across the divide, I should say that I am grateful to Conservative Members, and to my hon. Friend the Member for Ealing North, for exposing me to that invigorating cross-examination. I hope that I have provided at least some information that will throw some light on future proceedings. However, it is apparent that there is a substantial division of opinion between Labour and Conservative Members on how the distribution of resources through the NHS should be arranged. 
 Conservative Members clearly want to return to the time of open competition based on providing the lowest possible price for NHS services. We should not go down that road. 
 Question put and agreed to. 
 Clause 11 ordered to stand part of the Bill.

Clause 12 - Prudential borrowing code

Chris Grayling: I beg to move amendment No. 273, in
clause 12, page 5, line 19, leave out subsection (2).

Win Griffiths: With this it will be convenient to discuss amendment No. 247, in
clause 12, page 5, line 21, at end insert 
 ', and have regard to the impact of private borrowing by foundation trusts on NHS trusts' access to capital'.

Chris Grayling: Amendment No. 273 is a probing amendment designed to establish more clearly the Government's intended criteria for shaping the code and, in particular, what is meant in subsection (2) by:
''any generally accepted principles used by financial institutions to determine the amounts of loans to non-profit making organisations.''
 Non-profit organisations are diverse and their financial structures differ. At one extreme, for example, is Standard Life, one of Europe's biggest insurance companies; at the other, a local sports club. Clearly, the financial structures within which both of those structures must work in order to secure borrowing are hugely different. Therefore, it would be valuable to understand precisely what the Government mean by ''generally accepted principles''. Why, indeed, is this subsection even necessary? 
 For a major lender lending to a non-profit organisation, the primary criterion is the ability to pay. The major lender will look at the nature and security of the income that the organisation receives. The nature of the membership of the organisation will also be considered because one issue that a lending organisation will inevitably consider is liability. We touched on that earlier in the debate, but the Minister has not yet dealt with it fully. 
 A borrower providing finance to a non-profit organisation will ultimately look at the security for that lending, which may be against assets. However, as we know, the core assets of a foundation trust cannot be used as security against lending. Therefore, an additional criterion that a lender will use to judge the security or otherwise of an organisation, its ability to repay and the fall-back if something goes wrong with its revenues, is the strength of the financial substance behind it. With a major limited company, the amount of money against which a lender will usually lend is related to the capital base of that organisation, which is the shareholding base. When Railtrack went into administration, the core value against which the administrator and creditors sought to take action was the money that the shareholders had invested. Ultimately, shareholders are the last group to lose 
 their money when something goes wrong. The capital that they have invested disappears. In the case of a non-profit organisation, there are no shareholders and no shareholder capital raised through a stock market issue. Therefore, where does the liability ultimately lie? Who ultimately pays the bill or loses their money if things go wrong? 
 If a typical, small non-profit organisation—the Minister's local Labour party association, for example—were to fall into major financial difficulties, in most circumstances, it is the members who carry the can. I suspect that his local association is not unusual in that respect. If members take on a property liability or fail to pay their tax on time and find that they run into cash flow problems, they are ultimately liable if the creditors come after them. Therefore, one of the generally accepted financial principles that financial institutions will use to determine the amounts of loans to non-profit organisations is whether the money can be recovered against the membership. However, in the case of a foundation trust, the membership consists of those who signed on the dotted line for £1. 
 With the Bill and the Government's drive towards creating foundation trusts, it is essential to understand what the liability is. Who carries the can? Who pays the bill if something goes wrong? Will the Secretary of State automatically step in, or are the individual members ultimately liable? When a non-profit-making organisation takes out a loan, one key criterion that the lender uses is, ''Where do I get the money from?'' Ultimately, the members are the ones who pay. 
 In framing the clause, what discussions did the Minister and his Department have with commercial organisations about the criteria that they use? Is the clause based on a substantial exchange of ideas and information? Is there a substantial basis for it? Has the Minister received guidance from the industry on what it would look for from foundation hospital trusts? Will he clarify whether such discussions have taken place? 
 May I anticipate slightly the issues that the hon. Member for Oxford, West and Abingdon will raise under amendment No. 247? That amendment raises a number of other questions; it is about the impact of borrowing by foundation trusts on the rest of the NHS. The Minister has clarified the fact that private borrowing by foundation trusts will not be able to increase the total amount of borrowing for the NHS. Of course that means that if a foundation trust secures private sector money, that will reduce the amount of public money that the Government have for spending on the health service, so arguably that is a way of cutting Government investment—replacing Government investment in the health service with private money. 
 I should be grateful if the Minister would address that issue. The provision that we are discussing risks constraining the freedom of foundation trusts to grow and develop their business. Let us suppose that a foundation trust decides to go to the private sector and borrow to buy a clinic. Let us say that the trust has been working closely with the private sector and 
 subcontracting work to a cataract clinic, and the parent company runs into difficulties and goes into administration. That asset is there on the shelf, waiting to be bought from the administrator. The foundation trust decides that it wants to borrow from the private sector, buy the clinic, expand its own capacity and continue to provide that service to patients. That is a perfectly realistic and reasonable scenario, and we certainly expect the freedoms that will be granted to foundation trusts to come into their own. 
 However, if my understanding of the current situation is correct, such a decision could not be taken without money being taken away from investment in other parts of the NHS. For the foundation trust to borrow the money to buy the clinic and continue providing its services to patients and develop those services, money would have to come off the borrowing available to another hospital elsewhere in the NHS. Surely that makes a mockery of the rationale for creating foundation hospitals. Surely the purpose of the exercise is to create freedoms that allow them to expand and develop their services. I do not see how such a constraint can permit foundation hospitals to have the freedom that they need to develop their services. 
 Inevitably, if a foundation hospital is in such a position, it will think of other ways of doing things. It might want to buy a new scanner. If it cannot borrow the additional amount without having an adverse effect on the NHS, it might look to lease the scanner. Will the borrowing code take into account classic off-balance-sheet debts, such as long-term leases? Will they have to be reflected in the total amount set out in the limit that each trust has, generated from the core code that the Government will develop? Or will off-balance-sheet financing, such as long leases, not have to be taken into account in the prudential borrowing code? 
 Lastly, has the prudential code already been developed? At the bottom of page 17, the guide states: 
''The prudential code will be made available to applicants during the time period for submission of the initial applications.''
 Last week the Government announced their first shortlist of applications for foundation status. One would therefore assume that the time period for submission of initial applications has passed. If so, and if the Government have fulfilled the undertaking that the prudential code would be made available to applicants, one would assume that the code has already been developed. If that is the case, can the Minister outline the shape of that code? If that is not the case, why does the guide say that the code would be made available? If the code has been developed, why does the clause say: 
''The regulator must make a code''?
 The regulator has not yet been appointed. I imagine that that person will not be appointed for several months, despite the fact that the job has been advertised. Could the Minister state whether the code has been developed, and if so, what it contains? I look forward to hearing his answer.

Evan Harris: I am grateful to the hon. Member for Epsom and Ewell for making my points for me. I do
 not know if that is the start of a new trend. If it is, I do not mind, because he did it very well. I have nothing to add on the basis for the amendment—[Interruption.] Hon. Members should wait. If the Minister will be generous in allowing me to intervene to seek clarification of his answers, I will not repeat the points made by the hon. Member for Epsom and Ewell.
 Some may feel that in proposing the amendment, we wish to limit the access of new providers in the market to private capital because of a fear that that would limit the ability of the rest of the NHS to borrow. That is not the case. We believe that the Chancellor of the Exchequer should not have been allowed to prevail, and that the loans should not count against departmental borrowing limits. If the Government had faith in prudential borrowing, there was no need for that to be the case. The consequence of the Chancellor's winning that battle with the Prime Minister and the Secretary of State for Health is that we are in what the hon. Member for Epsom and Ewell described as a zero-sum game. If that is the position, it should say so on the face of the Bill. 
 This is the point where we and the Conservatives may part company. I argue—as they do—that there is a restraint on the ability to borrow. However, I also argue that that is unfair. The Minister has said that the Government will honour capital allocations for the next three years, and that all trusts will be foundation trusts by the end of that period. If that is the entire allocation—and if there is not another allocation that will be diminished by borrowing in the meantime—the unfairness may not arise. However, if he cannot guarantee either that the honoured capital allocation is the maximum that could have been allocated against the Department of Health's limit, or that all trusts will have the same freedoms—and that they will all be restricted by the limit—there is unfairness between those that can take advantage of the limited freedoms, and those that cannot take advantage of those freedoms and will have their allocation restricted by virtue of the freedom given to new providers. That is the purpose of the amendment. I hope that the Minister will point out where I am wrong if there is not a problem or, if there is, explain how it can be addressed.

Stephen McCabe: I want to make four brief points about the amendments. This represents some of the central anxieties felt by those of us who support the general principle of the Bill. I hope that amendment No. 273 will not be accepted. Subsection (2) contains the essential safeguard that stops foundation trusts running up excessive debts and going bust. We do not want that to happen. We do not want the past experience with other trusts to be replicated, so I hope that we will reject the idea.
 Amendment No. 247 raises a point that has been touched on several times today. We want to know whether there is extra borrowing capacity as a result of these proposals or whether the extra that the trusts can borrow comes off the NHS total. If it does, it suggests that there could be a preference for those trusts at the 
 expense of other parts of the NHS. That is a pretty central anxiety for a great many of us. It would be helpful if the Minister could be clear as possible about the status of the code. Some of the chief executives who responded to the initial proposals raised doubts about the financial proposals. They were keen to see what the code would contain. Finally, will long-term leasing be taken into account in the prudential borrowing code?

George Young: To follow up the point developed by the hon. Member for Birmingham, Hall Green (Mr. McCabe), I must observe that the Minister is caught between a rock and a hard place. If he agrees with his hon. Friend and says that despite the heroic work envisaged in the Bill no extra money would go to foundation trusts, he must then confront the chief executives of the foundation trusts, who will ask what is the point of it all. In replying to that question, he must disappoint either his hon. Friend or the chief executives of the foundation trusts.
 I should like to raise a different point, which builds upon what my hon. Friend said. Subsection (2) refers to 
''generally accepted principles used by financial institutions to determine the amounts of loans to non-profit making organisations.''
 I hope that the Minister can be open about the amount of work that has already been done by his Department. Although formally this is a matter for the regulator to decide, much of the work has already been done by the Department. It would be helpful if he could confirm that the process is roughly as follows. A foundation trust will look at what is called its pre-cash flow, which is any surplus that it has on its income over its expenditure plus its depreciation allowance. That is then fed into a number of equations. 
 Many hospitals in the south-east have no surplus. The North Hampshire Hospitals NHS trust runs at a deficit. The question of using that part of the pre-cash flow to determine the prudential borrowing limit is rather academic. Many hospital trusts have only their depreciation allowance. Which of the formulae that have been explored by the Department will be recommended? The amount that a trust can borrow varies substantially according to which benchmarked ratio one chooses. One of the ratios is the debt service cover ratio—the number of times that the debt, which is the interest plus principal, can be serviced by the pre-cash flow. 
 If one applied that ratio to the North Hampshire Hospitals trust it could borrow about £12 million. Its depreciation allowance would withstand that sort of debt. That allows a ratio of two. In other words, the pre-cash flow has to be twice the interest and the principle. 
 The Department are considering other ratios, such as debt to net revenue, which is the percentage cost of servicing the debt—principal and interest—as a percentage of the total revenue of the trust. I understand that the figure being considered is 4 per cent. If that figure were applied to the North Hampshire Hospitals trust, it could borrow £28 million, as opposed to £12 million if it used the 
 debt service cover ratio. The amount that can be borrowed therefore varies widely. The third ratio, which is being considered under the prudential capital code, is the interest cover ratio—ICR. That applies to the number of times that the interest could be serviced by the pre-cash flow. The ratio being considered for that is three. Under that formula, the hospital in my constituency could borrow £21 million. 
 It is clear that the trusts have got some way round the course in applying, and I would have thought that the Department must have some idea which of the ratios it is likely to recommend to the regulator. Without that sort of information, it will be difficult for a trust to know whether it is worth applying to be a foundation trust. A trust could make a rough guess at what it might get if it did not apply to be a foundation trust, but it needs to know how much it could borrow if it applied and was successful. In the case of the hospital that I have mentioned, that could be anything between £12 million and £28 million. That could not be borrowed every year, of course, because the pre-cash flow would have to service the debt incurred in year 1, and could not be applied to fresh debt in year 2.

Chris Grayling: In the commercial world, there are two other factors that could affect the borrowing powers of a trust. The first is whether it has assets beyond its core assets—some trusts will be much better endowed than others. Secondly, borrowing against assets to secure new treatment services, such as new clinics, will generate additional revenue and affect the formulae. However, under the rigidity of the Government's proposals, neither of those would be permissible.

George Young: My hon. Friend is right to say that a trust cannot use regulated assets as security, although those would normally be taken into account by a financial institution. Regulated assets are expressly precluded by the Bill.
 I hope that the Minister will be open and indicate to the Committee which of the ratios his Department are working on, to give some guidance to trusts on how much they might be able to borrow were they to become foundation trusts.

Andrew Lansley: I am interested to hear what my right hon. Friend has to say, and I shall not attempt to add too much to it, except by contributing one thought. As I understand it—the Minister will correct me if I am wrong—the issue that my right hon. Friend did not take into account is the interest that must be paid on public dividend capital. The limit will be applied on the total indebtedness of the trust; it is not a limit on additional borrowing, but on total borrowing. Within that limit on total borrowing, the existing public dividend capital will be netted off.
 I do not know the circumstances of the hospital in my right hon. Friend's constituency, but if it were a new hospital and the Government had paid a large amount of capital to build it, it would have correspondingly on its balance sheet public dividend capital alongside the interest charge against it. The headroom for borrowing might be modest. The extent 
 to which borrowing could occur would, as my hon. Friend the Member for Epsom and Ewell suggested, be more a question of the extent to which the project concerned would give rise to additional capacity, which would in turn give rise to additional revenue to service the debt.

Chris Grayling: In some cases, one would expect applicants for foundation status to be trusts that have just built new hospitals using PFI. The question would therefore arise whether PFI liabilities, which might take a variety of forms, would also appear and be taken into account within the prudential code, as they should.

Andrew Lansley: The same principle applies, and we are not speculating about that, given that the ''Guide to NHS Foundation Trusts'' says:
''prudential limits would apply to the total indebtedness of the NHS Foundation Trust as a group, i.e. all borrowing both public and private across the structure.''
 Clearly, it includes the PFI borrowing that is already in place.

Chris Grayling: One of the issues in recent times has been that the Government have not declared PFI debt as national debt, so it is off-balance-sheet. None the less, the debt of all the foundation trusts would have to be taken into account within the prudential code, which would mean that all of it could not be put on the national balance sheet.

Andrew Lansley: My hon. Friend uses the term ''balance sheet'' in a particular sense, which I would not do for such a purpose. We tend to say, ''Is it on the balance- sheet?'' meaning, ''Is it in the national Exchequer accounts?'' PFI does not appear in the Exchequer accounts. However, it does appear on the balance sheet of the trust, and we are trying to resolve what is the prudential limit on total indebtedness of a trust, including the PFI money? If we are wrong, the Minister will put us right, but I think that that is the question.
 I shall track that point. It means that if an NHS trust is becoming an NHS foundation trust, but—contrary to the scenario that I have just painted—it has old buildings with high maintenance costs and the like that are accruing to undermine its revenue position, the incentive to borrow, and the availability of borrowing, would be high. 
 That is not an idle scenario. I have spoken about Addenbrooke's trust, but in my constituency there is also the Papworth Hospital NHS trust, which in 1997–98 was one of the hospitals that sought to go down the PFI route. When the Government were elected in 1997, they said that they would not have many people pursuing PFI status, but a small number would be in the fast-track system. Papworth lost out for the simple reason that in those circumstances, the ''PFI-ability''—if I can put it like that—is dependent on the ability of the private financier to generate efficiency savings on ancillary, not medical, services and to contribute to the financing of the project, thereby relieving the burden on the hospital itself to pay. The Papworth trust was not ''PFI-able'' to the extent of some others, because the trust had already delivered every conceivable efficiency saving that it possibly 
 could on all its non-medical services, and quite a few on its medical services. 
 I painted that scenario to demonstrate that I can see where such arguments are coming from. If there is not a route for PFI, for somewhere such as Papworth there is at least a route to capital, which will enable it to do its job of rebuilding the hospital, wherever it chooses to go. It will need to be rebuilt and it will be a big project. At the moment that project is sitting in the queue for borrowing from the NHS, to which the Minister referred. 
 A big sum will be required, so while I understand why we want trusts to become foundation trusts and to have access to NHS borrowing, I do not see how the way in which they will get into the queue to have their big project financed in the future will be different from what happens now. Let us suppose that the Department of Health has a limit on its overall budgets, including its overall capital budget, and Papworth comes in—a point that was raised by the hon. Member for Birmingham, Hall Green. I am saying that from the perspective of a hospital that says, ''Right. We have not been able to get our project, but we have become an NHS foundation trust and, lo and behold, we get our project.'' Other things being equal, that must mean that there are other projects that will not receive the same capital. They may be less necessary, but that is neither here nor there. 
 That brings me to PFI. There are three things that I want to be sure about. The first is that before we discuss public dividend capital, we are clear that it is part of the total indebtedness of the trust. We are dealing with something that bears directly upon the borrowing limit. Secondly, the private finance initiative is counted towards the borrowing limit, but it is not going to be managed in the same way. Therefore, a trust looking to undertake future capacity building might still choose to go down the PFI route. 
 We should ask whether the additional capital activity will form part of the borrowing limit if the finance in question is not loaned to the trust but is capital raised by the private partner. If it is not borrowed by the trust, clearly it will not form part of the borrowing. It is true that many foundation trusts will choose to make their capital investment, although Papworth will not. At others, such as Addenbrooke's, the elected care and medical genetics centre that is on its way as a PFI project will not form part of the borrowing limit. So long as that is clear, it is fine. 
 We then have to ask about the freedoms. I am surprised that the guide to NHS foundation trusts says, at paragraph 5.22, that 
''An NHS Foundation Trust will continue to be able to procure capital schemes using the Private Finance Initiative process, subject to the same degree of oversight as applies under the current arrangements.''
 Is no freedom to be offered to the foundation trusts to undertake PFI projects according to their own discretion, or will they be left under the same regime as at present? How will becoming a foundation trust benefit a new hospital that wants to add further capacity through the PFI route? 
 Finally, I come to the relationship between the borrowing code and the commissioning bodies. So far as I can see, we have at best a three-year forward programme of expenditure, and service level agreements that will probably happen on a yearly basis. There are some indicative relationships with commissioning bodies. If one is going to undertake capital investment, not on a PFI basis but using the financing facility from the Department of Health, one will probably still be doing it on a 25-year basis. The calculations will certainly be done on that basis. 
 How will that serviceability relate long-term borrowing to short-term commissioning? Will the assumptions about the serviceability of debt not, in practice, track back to the strategic health authority's deciding on the configuration of services? Only if the SHA agrees that the future configuration of services will be consistent with commissioning bodies' buying those services long-term can that debt be serviced effectively. My worry is that we talk about capital freedoms but that when we look closely, the issues still track back to decisions that are made at strategic level by the relevant SHA or the Department of Health.

John Hutton: I shall deal with the amendments first, and then with the wider points that have been raised. Amendment No. 247, tabled by the hon. Member for Oxford, West and Abingdon, requires the regulator to have regard to the impact of NHS trusts' access to capital. That point is already reflected in the Bill; we covered that ground many times in our debates on clause 3.
 I assume that amendment No. 273, which would remove the requirement to have regard to generally accepted principles in the setting of a prudential borrowing code, is a probing amendment—

Chris Grayling: I said so.

John Hutton: I am sorry. I did not recall the hon. Gentleman's having said so but I am delighted that he did, because it would have been daft for the Committee to consider such a proposal. As my hon. Friend the Member for Birmingham, Hall Green made clear, it is right that the Bill should set out the general principles on which the code should based. A strong case can be made for leaving the clause as it stands.
 I shall now deal with some of the points raised in the debate, which naturally went into some of the underlying arguments. The right hon. Member for North-West Hampshire made a telling and well informed contribution to the debate, as did the hon. Members for South Cambridgeshire and for Epsom and Ewell. The question arose of who had been consulted on the principles for the prudential borrowing code. Wide consultations have taken place with the major banks engaged in the health sector in the United Kingdom, and the relevant major credit rating agencies have been involved, as have been the non-executive and financial directors of the prospective foundation trusts. 
 The discussions have been widespread, and I am glad that the right hon. Member for North-West Hampshire is aware of the details; I am happy to share them with the Committee. However, I have a dilemma in responding to the right hon. Gentleman. He is 
 effectively asking me to tell the Committee what the prudential borrowing code will say about the ratio that should be applied to the code. He knows that we have had wide-ranging discussions with all the foundation trust applicants about the shape of the prudential borrowing code; for instance, he mentioned service cover ratios, debt service to revenue ratios and interest cover ratios. Those were all discussed with the applicants during the consultation process. 
 All that I can say is that, under the Bill, it is the job of the regulator to promulgate the eventual code. However, it is unlikely that only one of those ratios will be selected. They are all likely to form part of departmental recommendations to the regulator, and it is worth noting that, currently, no financier relies on only one of them. All use a range of ratios, and we are likely to suggest that to the regulator. 
 The hon. Member for Epsom and Ewell spoke about long leases. Essentially, he is inviting me to tell the Committee in detail what accounting rules will apply to NHS foundation trusts. It is difficult for me to do so. A live debate is continuing on that issue, and it will cover the full range of accounting procedures, including the treatment of long-term leases. I cannot second-guess what the outcome will be for the accounting rules for NHS foundation trusts.

Chris Grayling: It is difficult to escape the conclusion that the measure is being rushed through. I referred to a footnote on paragraph 5.17 of the guide, which states:
''The Prudential Code will be made available to applicants during the time period for submission of initial applications.''
 We already have a shortlist of hospitals, and we are not expecting the regulator to be in place for some months, yet the Minister cannot give us details of the basis on which the decision will be made. Either it is a rushed bodged job, or the Minister is not giving the Committee the information that it has a right to expect.

John Hutton: It is certainly not a rushed bodged job. The code has not been finalised. As soon as it is, it will be published; it will be in the public domain. It is the job of the regulator. The post has not yet been established by Act of Parliament. The final publication of the prudential borrowing code will have to await that event. However, we are discussing with applicants for foundation trust status some of the general principles that are likely to apply, which is sensible; but they know, as I hope that the Committee knows, that no decisions have been made about the details of the code. That is the basis on which the discussions are taking place. I am not withholding information from the Committee, as I hope all hon. Members understand. That is not what I do.

Stephen McCabe: For the sake of clarity, is my right hon. Friend saying that some preliminary work is going ahead on the code, but when the regulator is appointed, the Department will have the option either to go along with that work or, conceivably, to tear it up and start again?

John Hutton: It is clearly the regulator's responsibility under the Bill to decide how to set the code. As hon. Members would expect, my officials are having discussions with both applicants, and we will obviously have discussions with the regulator when the regulator is appointed. We are advertising that post as we speak. Once the shadow regulator has been established, those discussions will continue. That is a sensible and prudent way to do things. It should not be seen as contributing in any sense to the description that the hon. Member for Epsom and Ewell attached to the process. It is not a bodged or rushed job.
 With the greatest respect, which I hope I always show Opposition Members, they are asking me to decide things that are not within my remit, because I am not the regulator. It will not be the job of Ministers to determine the accounting rules either. They are perfectly fair, reasonable and legitimate questions, but sadly it is not within my remit to provide the level of detail for which I am asked. 
 The impact of private finance deals will be as the hon. Member for South Cambridgeshire described. The total amount of borrowing that underpins PFI deals will not score against the individual trust's prudential borrowing limit. Of course, that is not the case; it is not borrowing that money. Ultimately, it affects the borrowing limit that the regulator will set in relation to the trust, because it is financed through cash flows and the revenue that the trust receives for providing the services to the local primary care trust. 
 If someone applies for a mortgage, the lender—the building society—will want to know the level of their indebtedness from credit cards, other mortgages, alimony, divorce settlement payments or whatever, because that affects their ability to finance the debt. Exactly the same principle will apply to the way in which the prudential borrowing limit is set. Obviously, with regard to large-scale PFI deals—some involve hundreds of millions of pounds—it would be unfair and inappropriate for all that to score against an individual trust's borrowing limit immediately. That would quite often mean that it could never borrow anything else, which is clearly not our objective. 
 There has been another rehash of the argument about how all that scores against the Department's overall capital expenditure limits. The Conservative party has had some merriment with that. Ultimately, it comes down to one fundamental issue. I do not want to go through the whole argument again, because my feeling is that we have heard it on at least three occasions already. I take it from what is proposed, and from later amendments, that the Conservatives approach this issue from the proposition that no borrowing limit should be applied or, if they believe that a limit should be applied, they will have cobbled together some bizarre formula of their own to reflect it. 
 It is worth bearing in mind the points that I made in the previous debate, on clause 11. Of course, there must be some prudential approach to borrowing; otherwise, we might encourage financial failure, which is in no one's best interests. That is a basic point, but it needs to be made. We have tried, in drafting the legislation and in the way in which we intend to 
 distribute capital resources across the NHS, to ensure that one part is not robbing Peter to pay Paul. I concede that that is a difficult balance to get right, but we have tried very hard to do that. We have set out on numerous occasions, not least on Second Reading, how we feel that that is being done. 
 My final point on this matter is the obvious one. Perhaps this will be construed as a partisan point, but I hope not; it is worth making. We had exactly the same debate when the Conservative party established NHS trusts in the 1990 legislation. That party imposed a borrowing limit on NHS trusts, and it did so precisely because it accepted the logic of the argument that we are advancing. It is not possible within the concept, as we understand it, of a public service—we keep talking about a public service—to have the situation that the hon. Member for Epsom and Ewell proposes. 
 The hon. Gentleman has made fun of the rules and procedures that we have established, but his views are not borne out by a proper analysis of the Bill and do not take into account Ministers' repeated explanations about the way in which the rules will operate.

Evan Harris: It was not clear from what the Minister said whether he was approaching the end of his remarks. I did not speak for long, nor did I repeat the points made by the hon. Member for Epsom and Ewell, but I asked a specific question. I believe that similar remarks were addressed to the Minister by the hon. Member for Birmingham, Hall Green.
 What is the position about taking from Peter to pay Paul within the overall limit, as the Minister puts it? If not all trusts are in this position by the end of the three-year capital allocation, will there be an impact or will there be an impact anyway, because the three-year capital allocation is not the sum total and more will be set against? 
 The Minister must forgive me if he did not understand my questions. I tried to put them clearly and I should be happy to give further clarification if he requires it.

John Hutton: It is my view that I answered that point repeatedly in the earlier debate. The hon. Gentleman knows the overall position. There will not be a total capital limit available to NHS foundation trusts or to NHS trusts other than that covered by the Department's expenditure limit. I have made that clear repeatedly. It takes us back to the points that I made in relation to clause 3 and the duties that the Bill imposes on the regulator. It is not a beggar-my-neighbour approach, and I have tried repeatedly to make that point.
 Eventually we come down to the basics here. Some perfectly reasonable questions have been asked about the way in which the rules will apply in detail. I have tried, within the limitations placed on me, to answer them as fairly as I can. There are some that I cannot answer, because they relate to decisions that the regulator or others must take. Of course we are in discussions with the applicants for foundation trust status to see how the rules might look and what the implications would be of determining prudential 
 borrowing limits for individual trusts. It is an important and delicate stage of the process. However, it is not fair to describe it as botched or rushed. It is important that those general principles are set out. We intend that the formulation of the code is transferred to the regulator. It will not be Ministers' job to determine it. 
 We are trying to be even-handed and to create a regime that contains additional financial flexibilities for foundation trusts, not only in relation to borrowing but also in the retention and use of revenue. Those are significant financial gains for NHS foundation trusts. Others will not, at this stage, be able to use those financial freedoms, because in the first wave not all acute trusts will become foundation trusts. That is axiomatic.

George Young: I am sorry to press the Minister, but it goes to the heart of the question posed by the hon. Member for Birmingham, Hall Green. If there are, as the Minister says, some gains for the foundation trusts, will there be some losses for the non-foundation trusts?

John Hutton: No, I do not think that that will be so. Crucially, the principal financial gain that we are talking about is the opportunity to avoid the bureaucracy of the current financial arrangements in the NHS and the requirement for every individual capital decision to involve someone higher up the chain saying yes. There will be financial freedoms over borrowing, which we have explored in some detail, but all those freedoms must operate within the overall settlement and framework that have been established for foundation trusts in the wider NHS.

George Young: If a foundation trust uses those freedoms and thereby borrows more than it would previously have been able to do, does that mean that a non-foundation trust will get less?

John Hutton: We have had this debate repeatedly. My right hon. Friend the Secretary of State addressed this point on Second Reading and I have made repeated references to it in the Committee. There is one point that we have not considered. We have, perfectly fairly, been talking about borrowing, but issues other than borrowing will go into the pot, such as the sale of surplus assets by the foundation trust itself. The establishment of NHS foundation trusts will not reduce the amount of capital available for developing NHS services for NHS patients.
 For example, proceeds from NHS trust asset sales are not added to central funds, but instead remain in the local health economy. The creation of NHS foundation trusts will not reduce the central funding available to the NHS. Proceeds from NHS trust asset sales are not typically taken into account when determining the amount of capital that is available for allocation. NHS foundation trusts are currently allowed to retain up to £10 million of proceeds from asset disposals, subject to demonstrating to the independent regulator's satisfaction that the proceeds that are used will be in line with the principal purpose. No unfair funding advantages will accrue to asset-rich trusts. 
 There is another point, which has not been developed. No additional source of revenue will be provided to foundation trusts to allow them to increase their borrowing. That would create a genuinely unfair advantage, and we are not proposing to do that.

Chris Grayling: Will the Minister confirm that if a trust gets foundation status and chooses to sell a surplus asset, it will be free to retain that funding, but that a non-NHS foundation trust that does the same thing will have to give the money to the Treasury?

John Hutton: Yes, that is the position. The current rules allow non-NHS foundation trusts to retain up to £10 million of the proceeds of that surplus asset, but it is true that the rules will be different for NHS foundation trusts: that is one of the financial freedoms that we are discussing. However, that would not be done at the expense of other parts of the NHS: that would be a local asset that the foundation trust would have freedom to use.

Stephen McCabe: I sense the frustration of my right hon. Friend the Minister as he tries to explain this. Perhaps I am being remarkably dim, but I cannot quite understand the mechanism that ensures fairness. Foundation trusts will be on a faster track—it will be easier to identify their borrowing needs and to make progress with their plans. I support that, but if the money all comes out of an overall borrowing sum—a total figure—I fear that by making all this fast-track progress they will be eating up that sum and that there will be less for the people who are plodding through the existing borrowing arrangement. What is the mechanism to ensure that that does not happen and that there is fair distribution?

John Hutton: That takes us back to the discussion that we had on clause 3 and the overall responsibility of the regulator to set a prudential borrowing limit, taking into account the effect of that on the wider NHS. There is a genuine issue that will help to address the matter of fairness that my hon. Friend has raised. With greater use of the revenue resources that are available to them, NHS foundation trusts will be able to fast track some of their borrowing—as my hon. Friend said—in a way that will not impact negatively on other parts of the NHS. My hon. Friend said that I am frustrated: I am not, but this is a repetitive argument—we have been round and round on this point throughout our proceedings.
 The fundamental question that we need to consider is whether there should be a prudential limit at all. It is, of course, possible to construct an arrangement without a prudential limit for borrowing, so that people will be free to borrow whatever they like irrespective of their ability to pay. We would then have to consider the consequences of that for the NHS as a whole. However, that is not a path that any sensible Government would go down: we have to start from that basic but important common-sense position. 
 I do not want to repeat these arguments because I feel that I am not convincing people about the merits of the case that I am putting forward. Everyone is 
 entitled to interpret this as they see fit. I have tried to explain the case that we have developed since these proposals were announced, and I genuinely believe that they will operate in a fair and transparent way across the NHS.

Evan Harris: The Minister does not want to repeat his answer, but I and some other members of the Committee feel that an answer has not been given, so we will not make any progress. He used the issue of retaining assets to show that there could be fair freedoms for foundation trusts, but is it fair for foundation trusts, on the basis of their status, to retain all their, say, £40 million of assets, when non-foundation trusts can retain only £10 million, with the other £30 million going to a central pot to be allocated elsewhere? The measure may be beneficial to foundation trusts, but it is surely unequal. The Minister may think that that is no bad thing, but he cannot deny that it is unequal to retain all of one trust's assets locally, while another's are dispersed across the whole NHS or, at least, across the whole strategic health authority.

John Hutton: Again, this argument tracks back to the origins of the proposals. We introduced them after having studied those parts of the NHS that had a good performance track record, including in financial management. We wanted to give those parts of the NHS greater operational freedoms. Whichever way one cares to cut it, a good case can be made for saying that those who perform well should receive a reward in the public service, just as they do in the private sector. That is a good thing, and that is what our proposals will do.
 I genuinely believe that there is no sense in allowing foundation trusts to use surplus assets in a way that could, in any objective sense, be regarded as taking something away from other parts of the NHS. The Bill does not do that, but it does give wider freedoms and the ability—earned through past performance—to take certain steps. 
 As hon. Members have helpfully reminded me, we have answered several parliamentary questions on this issue. Those answers set out matters in much greater detail than I have been able to give today. 
 As in earlier debates, we have extensively traversed the range of financial freedoms that will be available to foundation trusts. I have tried to set out why the amendments should not be accepted and why they would make the Bill worse if they were. If any of them are pushed to a Division, I hope that my hon. Friends will join me in rejecting them.

Chris Grayling: I made it clear that the amendment in my name and those of my hon. Friends was a probing amendment, and I shall return to it in a moment. Clearly, however, I have no intention of pressing it to a vote. None the less, the discussion has highlighted why Conservative Members feel so profoundly anxious about the Bill, why we believe that it is flawed and why we opposed it on Second Reading. Our discussions have given rise to three issues that clearly undermine the Government's strategy.
 The first is the simple principle that the freedom to borrow should bring more resources to the NHS, not simply reshuffle existing resources. If the measures simply move money around the system, they are fundamentally flawed and will add no value. Indeed, they will probably create additional bureaucracy and do nothing for patients. In that respect, they are plain wrong. 
 The second point relates to membership liability, although the Minister did not answer my points in that regard. My view is based on all the arguments that we have heard in Committee. Given the issues that financial institutions usually take into account when lending to non-profit-making organisations—the legal structures that have been established, and the absence of guarantees and limited liability—members of the local community and of the staffing community who sign up as members of the trust will ultimately be liable for any financial problems that the trust incurs. I should be grateful if the Minister would correct me on that.

John Hutton: That was the very first question that I answered in Committee—however long ago that was. There is no question of individual liability on the part of staff or members of the foundation trust—that is absolutely clear. Foundation trusts are not limited liability companies.

Chris Grayling: That is precisely the point. Limited liability companies would not carry a risk to the membership—whether shareholders or members. That is true whether we are talking about a company that is limited by guarantee or a limited company. However, nothing in the proposals suggests that there is any limitation on the liability. Is the Secretary of State liable for financial issues that arise in the management of the trusts? If he is, where is that stated in the Bill? If he is not, the only other people who can be liable are the members. Will the Minister clarify that point?

John Hutton: In a strictly legal sense, the debts and liabilities of the NHS foundation trusts are the responsibility of the trust itself as a legal entity. Let me make it absolutely clear to the hon. Gentleman and the Committee that staff or members of the public constituency would not have any legal responsibility whatever for NHS foundation trusts' debts.

Chris Grayling: In that case, who does have responsibility for them?

John Hutton: I have told the hon. Gentleman who has responsibility; the corporation.

Chris Grayling: The practical reality is that, in the case of the vast majority of non-profit-making organisations that do not have limited liability for their members—as would be the case in companies limited by guarantee—it is the members who ultimately carry the liability. Can the Minister provide further information about the legal position on which his statements are based? Ultimately, if any organisation runs up substantial debts that it cannot pay, somebody is liable.

Andrew Lansley: I am rather surprised, because I thought that I understood the situation, which was
 straightforward. The directors of the trust will incur liabilities. I assumed that, in so far as they incur liabilities in a regulated system, and do not exceed any of their powers under the Bill, if there were to be a catastrophic failure of the trust that left liabilities, they would not necessarily flow to the directors, because they had behaved in a prudential fashion. They would therefore flow back to the Exchequer, which had set up the regulatory system within which they worked.

Chris Grayling: The Minister may correct me, but I do not think that is the case. The Government have constantly made it clear that those are separate organisations, and that the Government, and so by definition the Exchequer, have no liability for any debts that arise. The Minister nods in agreement, so I assume that that is the case. That takes us back to the argument that the only people who can be liable are the members, or the governing body and the directors. That is not set out anywhere in the Bill. When those debts are ultimately incurred, I cannot see who else would be liable.
 When discussing the Bill, we keep seeing ways in which it will create huge disparities between foundation trusts and non-foundation trusts. The Minister knows that Conservative Members would have given foundation trust status to every hospital at once, and not created a hybrid situation in which some enjoyed it and some did not over many years. In our discussions on the disposal of assets, or the right of one hospital to retain much more money from selling assets than others, or hospitals being able to take other decisions using the freedoms in the Bill that some will enjoy and some will not—we have talked about the right to retain money from the tariff or not—the reality is that, over a number of years, we will create an NHS in which some hospitals enjoy freedoms that others do not. 
 That will inevitably attract staffing to those hospitals. The best pupils will want to go and work in a foundation hospital, rather than a non-foundation hospital. It will pull resources, expertise and skills into a small number of centres of excellence based on a star rating system that we know is fundamentally flawed. That system will not do any favours for patients and trusts across the NHS. It should have been all or nothing. I do not seek to press the amendment to a vote. I simply hope that in due course the Minister can provide more substantial information about the issue.

Evan Harris: I am grateful for the opportunity to respond to the debate before the amendment is formally withdrawn. I wish to echo the point that has just been made, and explain why I found the debate so frustrating.
 There is an answer that the Minister could have given to the question raised by me and by the hon. Member for Birmingham, Hall Green. I reinforce, though not with as much concern for effect as Conservative Members, that the answer could have been that, yes, it is a zero-sum game; there is a total number of assets that could be distributed, a total amount of borrowing, and arguably a total amount of profit to be had against tariff funding—although we have not had confirmation that foundation trusts will have that advantage. Those are unchangeable and 
 giving foundation trusts the ability to retain assets to a greater degree than non-foundation trusts, or to borrow through another stream that is not available to non-foundation trusts, will mean that those who have freedoms will gain more asset retention and capital from borrowing. That can come only from those who do not have or do not yet have that status. That is the answer. I do not understand why the Minister does not say that that is the case and defend it on the basis that we shall never move from where we are now to where we want to be, without creating some tier-isms. He could give such an answer, but he has studiously avoided accepting what is clear, referring only to a debate on clause 3, which did not deal with the matter. 
 It is bad that there is that inequity. However, that is not because there is inequality, because life is like that and some trusts are already fortunate enough to be able to recruit staff without having to go to agencies. The option of accessing those freedoms is not open to all on an equal basis, because it will be selected by the Secretary of State. Worse still is that the right hon. Gentleman is using a flawed criterion. It is unfair. It is not clinically based. It is spurious. That is the star rating. 
 I said what I am about to say on Second Reading. I am reassured that I was right to say it. What is so frustrating about the Government's position is that they are trying to have it both ways. They are trying to reassure their own left wing that such a policy is not unfair and trying to reassure those on the official Opposition Benches that wonderful freedoms will flow to foundation trusts. The Minister will have to deal with such matters sooner or later in our debates. 
 The Minister claims that one advantage of giving the freedoms to foundation trusts is that they will be less bureaucratic in accessing them. I hope, for his sake, that that is the case. However, the experience with private finance initiatives is that seeking to access private borrowing while remaining part of the public sector adds to the bureaucracy. That is perhaps for a good reason, but no one can say that PFI is fast and efficient, although it is at least genuinely new capital that is accessed. I tried to give the Minister a way out on the basis of his earlier commitment to honour the three-year capital allocations. He chose not to comment on that in the context of amendment No. 247.

John Hutton: I said that in the earlier debate. To be fair, I did not feel the need to detain the Committee with a further reminder of my earlier commitment in relation to those allocations.

Evan Harris: My question was not whether those allocations would be met, but whether that commitment would remove the scepticism that the capital allocations to non-foundation trusts in those three years can be unaffected by additional borrowing obtained by foundation trusts in a couple of years' time when they first get going. It is accepted that all trusts will not have the status within the three years from the beginning of that capital allocation, which is why the honouring of that commitment is not an
 answer to my questions and those asked by the hon. Member for Birmingham, Hall Green.
 Sooner or later, the Government will have to come clean and debate the issue on its merits, instead of trying to have it both ways.

Chris Grayling: I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Chris Grayling: I beg to move amendment No. 78, in
clause 12, page 5, line 22, at end insert— 
 '( ) persons, other than an NHS trust, who have made an application under section 5,'.

Win Griffiths: With this it will be convenient to discuss the following amendments: No. 79, in
clause 12, page 5, line 23, leave out paragraph (a).
 No. 248, in 
clause 12, page 5, line 25, at end insert— 
 '(bb) representatives of employers, employees and patients,'.

Chris Grayling: We have had two lengthy debates, so I propose to run quickly through the points behind the amendments. Much of the debate on amendment No. 79 has already taken place.
 Amendment No. 78 is simply designed to add to the list of consultees the other group eligible to apply for foundation status. It seems completely wrong that the regulator must consult every NHS trust applying to become an NHS foundation trust, but exclude those bodies that are not NHS trusts but may, under clause 5, make the same decision in the next few months. I hope that that is an uncontroversial addition that the Minister can accept. The amendment would simply make it a duty to provide a level playing field for all those seeking foundation status. 
 The Minister will undoubtedly say that subsection (3)(c), which says 
''such other persons as the regulator considers appropriate'',
 will cover the issue; but as the Bill stipulates quite separately in clauses 4 and 5 that there are two categories of people who may apply for NHS foundation trust status, it is entirely appropriate to place a duty on the regulator to consult both groups on the making of the code if they are applying for foundation trust status. 
 Amendment No. 79 was always intended to be a probing amendment to allow us to establish more detail about the Secretary of State's role. We have had considerable discussion about that, so I shall confine myself to a question of process. I referred to the footnote in the guide about the code being made available to applicants during the submission of applications. The Minister responded that considerable work was being done in the Department, and that discussions were taking place with the trusts. However, later in the year, that work will be handed to the regulator so that he can put the code together. Can the Minister give us a timeline for how that will fit together? Clearly, if it happens too late in the process, a lot of the work that has been done by the applicant trusts will already be complete, and a 
 change to the prudential code late in the process will have a material impact on the business plans. 
 Can the Minister say what the timing might be for the parallel tasks of appointing the regulator, allowing the regulator time to draw up the code, the process of completing applications and the moving on to the final stages for the trusts pursuing foundation trust status? How will that work, and how can we make sure that applicants are not disadvantaged if the code arrives too late in the day?

Evan Harris: Amendment No. 79 stands in my name, too. I do not expect the Minister to repeat what we have already said—I shall not do so, either—but we do not think that the Secretary of State should have the roles that the Government have given him, or that the borrowing should be against a limit for the Department of Health. We have already rehearsed that argument.
 I shall briefly speak to amendment No. 248, which is in my name and those of my hon. Friends only. It is a restatement of the concerns raised about the unfairness that might be introduced in the short to medium term, or at least until all trusts are foundation trusts. Before making the code, the regulator must have a specific duty to consult more widely than is set out in the clause, because there are other people who are affected by the detail and general principle of the borrowing ability and the prudential code, namely the users and staff in the health service. 
 This is one of the few parts of the Bill in which there is not even a gesture towards specifying that representatives or users of a part of the NHS that is as affected as the foundation trusts, but in what we would see as a deleterious way—the Minister really ought to accept that—at least in the interim, should be consulted. They should not be forgotten, because that way lies continuing strife in the health service. As the Minister knows, there is already concern that the measure will cause unfair two-tierism, and not bothering to mention that there will be consultation with the other group affected by the changes can only add to that.

John Hutton: The hon. Member for Epsom and Ewell prefaced his remarks by saying that these were essentially probing amendments that would delete the Secretary of State from the list of consultees. He acknowledged that we had already covered much of that ground, so I do not think that there is anything useful that I can add to the discussions that we have had. I have given him an indication as to what is happening. He is right that he has anticipated my remarks in relation to the amendment that he has tabled on non-NHS trust applicants. Under clause 12 as it currently stands, the regulator can consult such other persons as he feels necessary.
 I cannot say with confidence that there will be any such non-NHS trust applicants when the prudential borrowing code is first drawn up, although there may be. However, it would not make a lot of sense to include in the Bill an obligation to consult applicants who have not yet come forward. I am perhaps reading too much into the argument, but we could do without that. If there were applications from such non-NHS 
 trust organisations, the regulator would be able to consult with them under the Bill as it stands. 
 I agree with the hon. Member for Oxford, West and Abingdon that it would be beneficial if the regulator consulted as widely as possibly when drawing up the code, and that is entirely in the remit of the clause as it currently stands. I have some problems with the choice of wording in the hon. Gentleman's amendment, but I do not take issue with him on the general principle that it is right to hold as wide a consultation as possible. That is what we would expect the regulator to do and it is what the clause would permit him to do, so I do not feel that there is a need to amend the Bill as has been suggested.

Chris Grayling: I am bit disappointed by that rapid response, because the Minister did not answer my questions about the time frames for the regulator's appointment, the completion of the code and the development of business plans for the foundation trusts.
 However, the Minister did respond on the issue of another application coming forward. The Government have just started advertising for the regulator's post. One assumes that it will take two or three months to complete that recruitment process, and that if the chosen person is currently in a senior position, he will be expected to give at least a three-month notice period, so it is unlikely that that person will be in the new position much before October. The appointee will then need to get their feet under the desk for a few weeks, so I cannot foresee a situation in which the code can be completed much before the end of the year. 
 Given the provisions that the Government have put into the Bill, they clearly expect that others might want to come forward and try for foundation trust status. That is perfectly feasible and one can think of an obvious example—the Minister will be aware of the recent troubles that the King Edward VII hospital in West Sussex has had. It is conceivable that a large private hospital with NHS business might seek to change its status and become an NHS foundation. If that were to be the case this year, I cannot see why there should not be a duty of consultation. Given all that we have heard this afternoon about the limitations that would be placed on total borrowing for foundation trust, the arrival of a new player would have a material effect on total borrowing across the NHS. I suspect that Ministers have not taken that into account in considering whether someone will come forward for foundation status under clause 5. Surely it is logical that that organisation take part in the consultation and in the assessment of the impact of the borrowing code on both its own operations and other NHS organisations. 
 I am disappointed that the Minister does not feel it right and proper that such organisations should be given a statutory right of consultation, as trusts and the Secretary of State have, and that the regulator is simply left to consult such other persons as are considered appropriate. 
 I hope that the Minister will leap to his feet and make a couple more remarks about the time frame. Am I right? Where will the business plans kick in? At what stage will the process be by the time the regulator is appointed? It would be absurd if the regulator were developing the prudential code after most of the work to set up the initial foundation trust had been carried out.

John Hutton: I apologise to the hon. Gentleman and to the Committee for not dealing with the point that he just raised—I lost sight of it in my haste to sit down. The point that he made is fair and reasonable. The preparation and publication of the prudential borrowing code has to be done in a timely way to ensure that it adds value to the application process, and does not come in at the end as an ex post facto process, which would be absurd.
 We would like to see the regulator publish the prudential borrowing code in November or December, and the hon. Gentleman is right to say that it will probably take until then to finalise the details of the code. That should be in time to benefit the applicants for the foundation trust process, and to make that process reasonable. 
 If by the end of the year the Bill has been passed and clause 5 has become section 5, and there is then an application from a non-NHS trust to become a foundation trust, the regulator would consult that organisation. The regulator would want to operate in an open, democratic and accountable fashion. I repeat to the hon. Gentleman what I said earlier: if such an application were to be made, the clause as it is currently drafted would allow the regulator to embark on a consultation with that applicant. 
 I accept the point that the hon. Gentleman made, which is reasonable and fair. The only thing that caused me to hesitate in accepting his amendment was the basic point that I made earlier—that when the legislation is passed there might not be such an applicant, which would make the provision rather peculiar. In those circumstances, I am not sure how the regulator would discharge his duty to consult, if the Bill contained such an express reference. I am probably making too much of the point, but that is why I am reluctant to accept the amendment. I shall think about it overnight, but I do not think that it would add anything to the Bill. I am not being curmudgeonly in denying the hon. Gentleman the opportunity to amend the Bill, and I hope that it may be possible to find something that we can accept from the Opposition— 
Mr. McCabe rose—

John Hutton: Or, indeed, from my hon. Friend.

Stephen McCabe: I do not think that I will be offering anything to the Minister. I ask him to think carefully before he makes concessions of that sort. It seems to me that it would be absurd for an organisation whose only motive is its current profit position to apply for foundation status, simply to help it out of a hole. Moreover, for such an organisation to be able to influence the outcome of the code to its satisfaction
 would be utterly at odds with the principles that we are pursuing. I hope that the Minister will not give too much scope to them.

John Hutton: My hon. Friend has made a good point, which we debated at some length when considering clause 5. I made the point then that clause 5 would not be a rescue route for organisations that were in financially poor health. We would not want them to be able to offload their financial responsibilities on to the taxpayer through that clause. If there were to be such an application, I am confident that it would not receive the initial approval of the Secretary of State. I do not, therefore, think that that mischief is likely to happen.
 As I said, I am happy to consider those matters, but for the reason that I indicated, I cannot say to the hon. Member for Epsom and Ewell that we are likely to agree to that particular amendment.

Chris Grayling: I am disappointed that the Minister is unpersuaded, but I do not wish to detain the Committee any longer, so I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 The Chairman, being of the opinion that the principle of the clause and any matters arising thereon had been adequately discussed in the course of debate on the amendments proposed thereto, forthwith put the Question, pursuant to Standing Orders Nos. 68 and 89, That the clause stand part of the Bill. 
 Question agreed to. 
 Clause 12 ordered to stand part of the Bill.

Clause 13 - Public dividend capital

Question proposed, That the clause stand part of the Bill.

Andrew Lansley: We have had a substantial debate, and I took the opportunity earlier to ask some questions about the relationship of public dividend capital to the borrowing code, so I will not return to that point. However, I should like to ask two questions, the first of which is, I confess, probably due to my ignorance, so I hope that the Minister will be able to enlighten me. Under section 10 of the NHS and Community Care Act 1990, NHS trusts are established with originating public dividend capital. Subsequent to their establishment as NHS trusts, where the trusts have received grants from the Government for the purpose of providing additional capital investment, have they had corresponding increases in their public dividend capital? Discontinuity and inequality will build up if they have not. Foundation trusts should start out with similar balance sheets. In so far as they have assets, they should have public dividend capital, and vice versa.
 Secondly, when the NHS foundation trusts come to borrow money from the foundation trust financing facility, clearly they will pay a rate of interest on what they receive as capital in that form. Separately, NHS trusts and foundation trusts, in so far as they have 
 public dividend capital, will pay a dividend; that is covered in subsection (4). 
 What is the relationship between those two rates likely to be? If NHS trusts receive capital from the Government with a dividend payable that is substantially less in terms of its return on capital than the return on capital requested of NHS foundation trusts in the form of interest on their financing facility, discontinuity between those two things will mean that there is a disincentive to becoming a foundation trust and borrowing money from the financing facility, rather than going to the Department for capital allocations, as happens at the moment. Will the Minister give us some reassurance that there will not be that perverse disincentive?

Chris Grayling: I would like the Minister to clarify a few more points. My assumption about how this will work is that the initial public dividend capital will become a de facto loan from the Government that will be paid and repaid—interest will be paid and the principle repaid in the conventional way—once the foundation trust is set up. Will the Minister confirm that? If the public dividend capital is set against the nominal capital base of the trust when it starts up, will there be any impact on the level of public dividend capital if the trust decides to dispose of part of its asset base against which that dividend capital has been assessed and reinvest that capital in something else? Will that have any impact on the public dividend capital, or is it simply regarded as a loan—a cash sum owed to the Government?
 Will foundation trusts be free to capitalise and repay their public dividend capital? Can they free themselves totally from public sector borrowing if they so wish? Can they come to an agreement to finance themselves entirely from a third-party source rather than the Department? Can they seek differential interest rates? Are they free to secure long-term 25-year finance at a low rate, or through a bank in another country, rather than repaying at a higher rate of return to the Treasury? 
 What is the term of the initial public dividend capital, if we assume that this is a loan? In what period does that initial block of money have to be repaid? Is that a variable interest rate or a fixed interest rate arrangement? 
 Will the Minister elaborate on subsection (3), which says: 
''The Secretary of State may, with the consent of the Treasury, decide the terms on which any public dividend capital of an NHS foundation trust is to be treated as having been issued.''
 Will he explain the purpose of the subsection more clearly? In particular, does he expect that all trusts will be treated in broadly the same way when their public dividend capital is set? 
 In another debate, my hon. Friend the Member for South Cambridgeshire made an important point about the different levels of public dividend capital between different trusts, based largely on the age of their buildings. Will the Government take any steps to ensure that a trust is not disproportionately disadvantaged simply because of the book value of its buildings? What valuations will be used? Will they 
 be the existing valuations on which the current public dividend capital is assessed, or will there be a revaluation process when the trusts are established to ensure that all trusts are operating on a level playing field, with common and comparable asset evaluation, and effectively an equivalent or fair value put on assets transferred from the public sector to their ownership. 
 How will the Treasury provide consent? What process will it go through? Must Treasury consent be provided for any other elements of the financing arrangement? This is the first reference to the Treasury in the Bill. Why is it in this clause? Will the Treasury have any other reference points in the financing, or is this reference to do with the Treasury's need to assess the public dividend capital, because of the implications for the public sector borrowing requirement?

George Young: I have a small query about subsection (5), which obliges the Secretary of State to consult the regulator before he uses his powers under subsection (3). It might seem innocuous, but on page 14 of the explanatory notes we see that subsection (5)
''requires the Secretary of State to consult the Independent Regulator before deciding the terms on which any public dividend capital of an NHS foundation trust is to be issued.''
 The implication is that the terms on which the capital might be issued could differ between an NHS foundation trust and an ordinary trust. Does the Secretary of State envisage different terms being attached to the public dividend capital for an NHS foundation trust and an ordinary trust? Those terms might be more severe or more lenient for a foundation trust.

Cheryl Gillan: I do not want to detain the Committee for long, but I spoke in an earlier stage of our proceedings about a point raised by the Royal College of Nursing, and I thought that I should now mention a couple of things it has raised about clause 13. Like my hon. Friend the Member for Epsom and Ewell, the RCN seeks clarification on the role of the Treasury in deciding the terms on which any public dividend capital from an NHS foundation trust is treated. It would also like to know how the clause will affect non-NHS organisations that gain foundation status. After rereading the requests of the RCN and hearing what my hon. Friend said, especially about subsection (3), I have a couple of supplementary questions for the Minister.
 How will the consent of the Treasury referred to in subsection (3) be sought? Who in the Treasury will be responsible for making that decision, and will that decision be publicised and put into the public domain? In what circumstances could the Treasury withhold its consent and what would be the implications of such consent being withheld? Would the Treasury have to publicise its reasons for refusal, and if such consent were withheld, who would adjudicate in a dispute between the Treasury and the Secretary of State? There is a general element to subsection (3) that is far too vague at this stage. I seek clarification and I would like the Minister to put more details on the record, so 
 that people interpreting the Bill later may be guided by his thinking on subsection (3).

John Hutton: I hope that right hon. and hon. Members will understand that I want to keep my comments on clause 13 to the minimum and sit down again before I take any more hits on the issues surrounding public dividend capital—a subject in which I know many of my hon. Friends take a close interest—but I am not among them.
 Half a dozen specific questions have been raised, so let me deal with those. In general terms, I stress that this is a technical provision designed to safeguard public assets and ensure that the public dividend capital of foundation trusts remains an asset of the Consolidated Fund. There are similar provisions for NHS trusts, which I am sure hon. Members will understand. 
 The answer to the first question asked by the hon. Member for South Cambridgeshire is yes. I have forgotten his second question; I am sure he will ask me again presently. Can public dividend capital be repaid? Again, the answer is yes. That is covered by clause 13(6). 
 I was asked several intriguing questions about the role of Her Majesty's Treasury and how we obtain consent from it. Of course, that is a mysterious process even to those of us who have been in government, and I do not want to go into it. However, I can say to the hon. Member for Chesham and Amersham (Mrs. Gillan), who asked who would adjudicate in disputes between the Treasury and the Secretary of State, that there never are disputes between the Treasury and my right hon. Friend the Secretary of State, so the need never arises.

Cheryl Gillan: The Minister is living in cloud cuckoo land, but I will let him occupy that space on his own for the time being. If he cannot imagine that there will ever be a Treasury refusal, why is the measure in the Bill at all? It implies that the consent of the Treasury could be withheld.

John Hutton: Yes, it is obviously true that consent might be withheld. Of course if it were withheld, there could not be any change to the rate at which PDC was repaid or to any other arrangement for which consent had been sought, and the status quo would be maintained. That would be the implication of a failure on the part of Her Majesty's Treasury to give
 consent. I do not believe that there is any science there that needs to be explained to anyone.
 The right hon. Member for North-West Hampshire asked a very telling question—he is good at that—about whether the PDC rate could be set at a higher level for NHS foundation trusts. Clearly, that would have an implication for lending, borrowing, cash flow and everything else. The answer is no, it cannot; that, too, is set out in the Bill, in clause 13(4). The PDC rate must be the same for NHS foundation trusts and NHS trusts. 
 I was asked a question about interest rates on money borrowed for NHS purposes from the financing facility. That would be similar to the PDC rate as well.

Andrew Lansley: Similar?

John Hutton: Similar. That is as far as I am prepared to go until and unless I get further advice. The clause is essentially a technical provision.

Chris Grayling: The one point that the Minister has not addressed is about valuations. Clearly, the PDC rate will have been set in different ways at different times for different trusts over the years. It is possible that unless they are based on a fresh valuation of assets, one trust may be disadvantaged compared with another, simply because of the origins of its capital assessment. Is there a plan to review the valuations to ensure that trusts are all on a level playing field?

John Hutton: Yes, a regular process is always under way. I can give the hon. Gentleman that assurance.
 I do not believe that there are any other outstanding questions, apart from, perhaps, the second question asked by the hon. Member for South Cambridgeshire.

Andrew Lansley: The Minister kindly answered it, but attributed it to my hon. Friend the Member for Epsom and Ewell.

John Hutton: That was unfair of me. I apologise to the hon. Member for South Cambridgeshire.
 There is no mysterious financial card trick being played here. This is a straightforward provision designed to protect and defend public assets, and I hope that the Committee will agree to it. 
 Question put and agreed to. 
 Clause 13 ordered to stand part of the Bill. 
 Further consideration adjourned.—[Jim Fitzpatrick.] 
 Adjourned accordingly at twenty-three minutes past Five o'clock till Tuesday 3 June at half-past Ten o'clock.